<PAGE> 1
AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
REGISTRATION NO. 333-__________
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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM S-4
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
(Exact name of registrant as specified in its charter)
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DELAWARE 7373 06-1361276
(State or other jurisdiction of (Primary SIC Code Number) (I.R.S. Employer Identification No.)
incorporation or organization)
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372 DANBURY ROAD
WILTON, CT 06897
(203) 761-7900
(Address, including zip code, and telephone number, including area
code, of registrant's principal executive offices)
BRUCE F. FAILING, JR.
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
372 DANBURY ROAD
WILTON, CT 06897
(203) 761-7900
(Name, address, including zip code, and telephone number, including
area code, of agent for service)
WITH COPIES TO:
HOWARD KAILES, ESQ.
KRUGMAN, CHAPNICK & GRIMSHAW
PARK 80 WEST - PLAZA TWO
SADDLE BROOK, NJ 07663
(201) 845-3434
APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE OF THE SECURITIES TO
THE PUBLIC: As soon as practicable after the Registration Statement becomes
effective.
If the securities being registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]
CALCULATION OF REGISTRATION FEE
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PROPOSED MAXIMUM PROPOSED MAXIMUM
TITLE OF EACH CLASS OF AMOUNT TO BE OFFERING PRICE PER AGGREGATE OFFERING AMOUNT OF
SECURITIES TO BE REGISTERED REGISTERED UNIT PRICE REGISTRATION FEE
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13-1/4% Senior Discount Notes due
2004................................ $99,999,805(1) -- -- $10,101(2)
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(1) Equals the aggregate principal amount at issuance of the securities being
registered which were issued with original issue discount.
(2) Pursuant to Rule 457(f)(2), the registration fee has been calculated using
one-third of the aggregate principal amount at issuance of the securities
being registered ($33,333,268.33).
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID SECTION 8(A),
MAY DETERMINE.
===============================================================================
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INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR MAY
OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT BECOMES
EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR THE
SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE SECURITIES
IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR
TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE.
<PAGE> 3
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CROSS-REFERENCE SHEET
PURSUANT TO RULE 404(A) AND ITEM 501(B) OF REGULATION S-K
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FORM S-4 ITEM NUMBER AND CAPTION PROSPECTUS CAPTION
-------------------------------- ------------------
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1. Forepart of Registration Statement and Outside Front Cover Page
of Prospectus................................................ Facing Page; Cross-Reference Sheet;
Outside Front Cover Page
2. Inside Front and Outside Back Cover Pages of Prospectus......... Inside Front Cover Page; Available
Information; Outside Back Cover Page
3. Risk Factors, Ratio of Earnings to Fixed Charges and Other
Information.................................................. Prospectus Summary; Risk Factors;
Selected Historical Consolidated
Financial and Certain Other Data
4. Terms of the Transaction........................................ Prospectus Summary; The Exchange Offer;
Description of the Notes; Certain
Federal Income Tax Consequences; Plan
of Distribution
5. Pro Forma Financial Information................................. Summary Historical Consolidated Financial
and Certain Other Data; Selected
Historical Consolidated Financial and
Certain Other Data; Interim Condensed
Consolidated Financial Statements
6. Material Contacts with the Company Being Acquired............... Not Applicable
7. Additional Information Required for Reoffering by Persons and
Parties Deemed to Be Underwriters............................ Not Applicable
8. Interests of Named Experts and Counsel.......................... Legal Matters; Experts
9. Disclosure of Commission Position on Indemnification for
Securities Act Liabilities................................... Not Applicable
10. Information with Respect to S-3 Registrants..................... Not Applicable
11. Incorporation of Certain Information by Reference............... Incorporation of Certain Documents by
Reference
12. Information with Respect to S-2 or S-3 Registrants.............. Prospectus Summary; Selected Historical
Consolidated Financial and Certain
Other Data; Management's Discussion and
Analysis of Financial Condition and
Results of Operations; Business;
Consolidated Financial Statements
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<PAGE> 4
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13. Incorporation of Certain Information by Reference...............
14. Information with Respect to Registrants Other Than S-3 or S-2
Registrants.................................................. Not Applicable
15. Information with Respect to S-3 Companies....................... Not Applicable
16. Information with Respect to S-2 or S-3 Companies................ Not Applicable
17. Information with Respect to Companies Other Than S-3 or S-2
Companies.................................................... Not Applicable
18. Information if Proxies, Consents or Authorizations are to be
Solicited.................................................... Not Applicable
19. Information if Proxies, Consents or Authorizations are not to
be Solicited or in an Exchange Offer......................... Prospectus Summary; The Exchange Offer
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SUBJECT TO COMPLETION, DATED FEBRUARY 14, 1997
PROSPECTUS
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
OFFER TO EXCHANGE ITS 13 1/4% SENIOR DISCOUNT NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED, FOR ANY AND ALL OF ITS
OUTSTANDING 13 1/4% SENIOR DISCOUNT NOTES DUE 2004
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME,
ON ________________1997, UNLESS EXTENDED.
Electronic Retailing Systems International, Inc., a Delaware corporation (the
"Company" or "ERS") hereby offers, upon the terms and subject to the conditions
set forth in this Prospectus and the accompanying letter of transmittal (the
"Letter of Transmittal" and, together with this Prospectus, the "Exchange
Offer"), to exchange its 13 1/4% Senior Discount Notes due 2004 (the "New
Notes") which have been registered under the Securities Act of 1933, as amended
(the "Securities Act"), pursuant to a Registration Statement of which this
Prospectus is a part, for an equal principal amount at maturity of its
outstanding 13 1/4% Senior Discount Notes due 2004 (the "Old Notes," and
collectively with the New Notes, the "Notes"), of which $147,312,000 aggregate
principal amount at maturity is outstanding as of the date hereof.
The Company will accept for exchange any and all Old Notes that are validly
tendered and not withdrawn on or prior to 5:00 P.M., New York City time, on the
date the Exchange Offer expires (the "Expiration Date"), which will be
__________, 1997 (30 days following the commencement of the Exchange Offer),
unless the Exchange Offer is extended. Tenders of Old Notes may be withdrawn at
any time prior to 5:00 P.M., New York City time, on the Expiration Date. The
Exchange Offer is not conditioned upon any minimum principal amount of Old Notes
being tendered for exchange. Old Notes may be tendered only in integral
multiples at maturity of $1,000. See "The Exchange Offer."
The New Notes will mature on February 1, 2004. No cash interest will be payable
on the New Notes prior to August 1, 2000. The New Notes will accrue cash
interest at a rate of 13-1/4% per annum, commencing on February 1, 2000, and
cash interest will be payable thereafter on February 1 and August 1 of each
year, commencing August 1, 2000. The Notes will not be redeemable at the option
of the Company prior to February 1, 2001. From and after February 1, 2001, the
Notes may be redeemed at the option of the Company, in whole or in part, at the
redemption prices set forth herein. Upon a Change of Control (as defined), each
holder of the Notes (a "Holder") will have the right to require the Company to
purchase all or any part of such Holder's Old and New Notes at a purchase price
equal to 101% of the Accreted Value (as defined) thereof, plus accrued and
unpaid interest, if any, to the date of purchase. There can be no assurance that
the Company will be able to raise sufficient funds to meet this obligation
should it arise.
The New Notes will be senior, unsecured obligations of the Company ranking pari
passu in right of payment of principal and interest with all other existing and
future senior, unsecured obligations of the Company and will rank senior to all
future subordinated debt of the Company. However, the CDA Note (as defined) is
secured by the assets of the Company and Electronic Retailing Systems
International, Inc., a Connecticut corporation and the Company's principal
subsidiary (the "Principal Subsidiary"). As of January 31, 1997, the Company had
recorded $99.9 million of total outstanding indebtedness. See "Description of
the Notes."
THIS PROSPECTUS AND THE LETTER OF TRANSMITTAL ARE FIRST BEING MAILED TO HOLDERS
OF OLD NOTES ON MARCH ___, 1997.
SEE "RISK FACTORS" BEGINNING ON PAGE 10 FOR A DISCUSSION OF CERTAIN FACTORS THAT
SHOULD BE CONSIDERED BY PROSPECTIVE PARTICIPANTS IN THE EXCHANGE OFFER.
THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES
AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE
ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A
CRIMINAL OFFENSE.
The date of this Prospectus is March ___, 1997.
<PAGE> 6
(continued from front cover)
The New Notes will be obligations of the Company evidencing the same
indebtedness as the Old Notes. The New Notes will be issued under and entitled
to the benefits of the same Indenture (as defined), pursuant to which the Old
Notes were issued such that the New Notes and Old Notes will be treated as a
single class of debt securities under the Indenture. The form and terms of the
New Notes are generally the same as the form and terms of the Old Notes, except
that (i) the exchange will be registered under the Securities Act and,
therefore, the New Notes will not bear legends restricting the transfer thereof,
and (ii) holders of the New Notes will not be entitled to any of the
registration rights of holders of Old Notes under the Registration Rights
Agreement, which rights will terminate upon the consummation of the Exchange
Offer. See "Description of the Notes."
Based on interpretations by the staff of the Securities and Exchange Commission
(the "Commission"), as set forth in no-action letters issued to third parties,
the Company believes that a holder who exchanges Old Notes for New Notes
pursuant to the Exchange Offer may offer for resale, resell and otherwise
transfer such New Notes without compliance with the registration and prospectus
delivery requirements of the Securities Act of 1933, as amended (the "Securities
Act"); provided that (i) such New Notes are acquired in the ordinary course of
such holder's business, (ii) such holder is not engaged in, and does not intend
to engage in, a distribution of such New Notes and has no arrangement with any
person to participate in the distribution of such New Notes, and (iii) such
holder is not an affiliate of the Company (as defined under Rule 405 of the
Securities Act). However, the staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances.
Each broker-dealer that receives New Notes for its own account in exchange for
Old Notes, where such Old Notes were acquired by such broker-dealer as a result
of market-making activities or other trading activities, must acknowledge that
it will deliver a prospectus in connection with any resale of such New Notes.
See "Plan of Distribution." The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." EXCEPT AS DESCRIBED IN THIS
PARAGRAPH, THIS PROSPECTUS MAY NOT BE USED FOR ANY OFFER, SALE OR OTHER TRANSFER
OF NEW NOTES.
Prior to this Exchange Offer, there has been no public market for the Old Notes
or New Notes. The Old Notes have traded on the Portal Market. If such a market
were to develop, the New Notes could trade at prices that may be higher or lower
than their principal amount. The Company does not intend to apply for listing or
quotation of the New Notes on any securities exchange or stock market.
Therefore, there can be no assurance as to the liquidity of any trading market
for the New Notes or that an active public market for the New Notes will
develop. See "Risk Factors -- Absence of Public Trading Market."
THE COMPANY WILL NOT RECEIVE ANY PROCEEDS FROM THIS EXCHANGE OFFER. THE COMPANY
HAS AGREED TO PAY THE EXPENSES OF THE EXCHANGE OFFER. NO UNDERWRITER IS BEING
USED IN CONNECTION WITH THIS EXCHANGE OFFER.
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AVAILABLE INFORMATION
The Company has filed with the Commission a registration statement on Form S-4
(herein, together with all amendments and exhibits, referred to as the
"Registration Statement") under the Securities Act with respect to the New Notes
offered hereby. This Prospectus, which forms a part of the Registration
Statement, does not contain all of the information set forth in the Registration
Statement and the exhibits and schedules thereto, certain parts of which are
omitted in accordance with the rules and regulations of the Commission. For
further information with respect to the Company and the New Notes offered
hereby, reference is made to the Registration Statement. This Prospectus
contains summaries, believed to be accurate in all material respects, of certain
terms and provisions of certain agreements; however, in each such case reference
is made to the actual agreements filed as an exhibit to the Registration
Statement, and all such summaries are qualified in their entirety by this
reference.
The Company is subject to the informational requirements of the Securities
Exchange Act of 1934 (the "Exchange Act"). The Registration Statement and the
exhibits thereto, and the reports and other information, filed by the Company
with the Commission in accordance with the Exchange Act may be inspected and
copied at the public reference facilities of the Commission at Room 1024,
Judiciary Plaza, 450 Fifth Street N.W., Washington, D.C., 20549 and at the
Commission's regional offices at Seven World Trade Center, 13th Floor, New York,
New York 10048, and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of such materials can be obtained from the
Public Reference Section of the Commission at 450 Fifth Street, N.W., Washington
D.C. 20549, at prescribed rates, and can also be obtained electronically through
the Commission's Electronic Data Gathering, Analysis and Retrieval system at the
Commission's Web site (http://www.sec.gov). The Company's Common Stock is listed
on The Nasdaq Stock Market and copies of such reports and other information can
also be inspected at the offices of The Nasdaq Stock Market, 1735 K Street,
N.W., Washington, D.C. 20006.
INCORPORATION OF CERTAIN DOCUMENTS BY REFERENCE
The following documents filed with the Commission are incorporated by reference
into this Prospectus:
(i) the Company's Annual Report on Form 10-K for the year ended December 31,
1995, as amended by Amendment No. 1 thereto;
(ii) the Company's Quarterly Reports on Form 10-Q, respectively, for the three
months ended March 31, 1996, the six months ended June 30, 1996 and, as amended
by Amendment No. 1 thereto, the nine months ended September 30, 1996; and
(iii) the Company's Current Reports on Form 8-K dated, respectively, June 20,
1996, July 11, 1996, December 18, 1996, December 20, 1996, January 24, 1997 and
February 7, 1997.
All documents filed by the Company pursuant to Section 13(a), 13(c), 14 or 15(d)
of the Exchange Act subsequent to the date of this Prospectus shall be deemed to
be incorporated by reference into this Prospectus and to be a part hereof from
the date of filing of such documents.
Any statement contained in a document incorporated by reference herein shall be
deemed to be modified or superseded for purposes of this Prospectus to the
extent that a statement contained in this Prospectus, or in any other
subsequently filed document which is also incorporated herein by reference,
modifies or supersedes such statement. Any such statement so modified or
superseded shall not be deemed to constitute a part of this Prospectus except as
so modified or superseded.
The Company hereby undertakes to provide without charge to each Holder to whom a
copy of this Prospectus has been delivered, on the written or oral request of
any such person, a copy of any or all of the documents referred to above which
have been or may be incorporated into this Prospectus by reference, other than
exhibits to such
<PAGE> 8
documents. Requests for such copies should be directed to: Electronic Retailing
Systems International, Inc., 372 Danbury Road, Wilton, Connecticut, 06897,
telephone number (203) 761-7900.
<PAGE> 9
PROSPECTUS SUMMARY
The following summary is qualified in its entirety by, and should be
read in conjunction with, the more detailed information and financial statements
appearing elsewhere in this Prospectus. Certain capitalized terms used but not
defined in this summary are used herein as defined elsewhere in this Prospectus.
Unless otherwise indicated, all references in this Prospectus to the Company
refer to Electronic Retailing Systems International, Inc., a Delaware
corporation, and its subsidiaries and, with respect to operations prior to the
Combination described below, its predecessors.
THE COMPANY
Electronic Retailing Systems International, Inc. develops and provides
electronic shelf label ("ESL") systems designed to allow supermarket chains and
other retailers to increase productivity, reduce labor costs and improve
management information systems. The Company is the leading provider in the
United States of ESL systems, based on management's estimates of installed ESL
systems. The ERS ShelfNet system (the "ERS ShelfNet System") has been designed
to replace paper price tags on retail shelves with electronic liquid crystal
display units and to provide a suite of applications to enhance a retailer's
pricing, inventory, shelf management, merchandising and promotional activities.
The ERS ShelfNet System is comprised of proprietary hardware and software that
electronically link a store's shelves to its point-of-sale ("POS") systems and
central computer.
The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software and
communications hardware, which are designed to interface with other store and
vendor applications. Each ESL is a miniature data transceiver that is capable of
storing, receiving and returning alphanumeric messages. The ERS ShelfNet System
is designed to allow retailers to:
- Implement price changes almost instantaneously from the
store's central computer or directly from corporate or
regional headquarters;
- Ensure pricing integrity by accurately displaying and
monitoring product prices;
- Streamline stock monitoring activities to reduce lost sales
resulting from the failure to properly stock items;
- Increase the speed and accuracy of placing product displays
and promotional material by reducing and simplifying the tasks
required of store employees; and
- Audit inventory more efficiently and improve computerized
inventory ordering systems.
ERS believes these features enable retailers to reduce labor costs, increase
productivity and pricing accuracy, and improve inventory management, thereby
raising such retailers' gross margins and lowering their operating costs in the
highly competitive U.S. retailing market. Management estimates, based on studies
conducted in collaboration with the Company's current customers, that a
supermarket with 15,000 ESLs that changes 2,500 to 4,500 prices per week could,
under the Company's proposed Tolling Plan (as defined), realize annual net cost
savings and benefits of approximately $40,000 to approximately $240,000 per
store through the anticipated level of usage of the full suite of applications
afforded by the ERS ShelfNet System. However, there can be no assurance that any
such cost savings or benefits will be realized by any customer. See "Risk
Factors -- Use of Assumptions to Estimate Net Cost Savings and Benefits".
As of November 15, 1996, the ERS ShelfNet System was installed in 63
U.S. retail stores, including stores owned by such leading supermarket chains as
The Vons Companies, Inc. ("Vons"), Stop & Shop Supermarket Company, H.E. Butt
Grocery Co. ("HEB"), Big Y Foods, Inc., Shaw's Supermarkets, Inc. ("Shaw's"),
Lucky Stores, Inc. ("Lucky"), The Great Atlantic & Pacific Tea Company, Inc. and
K Mart Corporation, and one
<PAGE> 10
2
supermarket owned by the Overwaitea Food Group Division of Great Pacific
Industries Ltd. (the "Overwaitea Food Group") in Canada. The Company's customers
include five of the 15 largest supermarket chains in the United States. The
Company estimates that, as of September 30, 1996, of the approximately 29,800
supermarkets in the United States, approximately 115 stores were operating ESL
systems.
RECENT DEVELOPMENTS
In December 1996, ERS announced that (i) it will launch a new marketing
and pricing program designed to facilitate rapid market acceptance and
installation of the ERS ShelfNet System and (ii) it plans in the first quarter
of 1997 to introduce enhancements to the ERS ShelfNet System that provide spread
spectrum microwave transmission of data directly to battery operated, wireless
ESLs. The Company expects that implementation of these initiatives will reduce
the cost of installing and maintaining the ERS ShelfNet System. In addition, ERS
has signed a non-binding letter of intent (the "Letter of Intent") with the
Overwaitea Food Group, a leading Canadian supermarket operator, providing for
installation of the ERS ShelfNet System in approximately 60 supermarkets
beginning in 1997. The Letter of Intent is subject to numerous conditions,
including negotiation and execution of a definitive contract.
NEW MARKETING AND PRICING PROGRAM
The Company historically has marketed the ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for retailers. As a result, the Company believes that retailers have
compared potential investments in the ERS ShelfNet System to alternative uses of
capital, such as store acquisitions and improvements. The Company now intends
also to offer the ERS ShelfNet System on a fee based, or "tolling", arrangement
(the "Tolling Plan") whereby the Company will own the system and, with no
upfront cash cost to the retailer, furnish the system to retailers (generally
for a period of up to five years), who will pay monthly fees to the Company
based primarily on their actual usage of the system. As a result, the Company
believes that the Tolling Plan will increase market acceptance of the ERS
ShelfNet System.
ENHANCEMENT OF THE ERS SHELFNET SYSTEM
The Company plans to introduce enhancements to the ERS ShelfNet System
that provide spread spectrum microwave transmission of data directly to wireless
ESLs. The enhanced ERS ShelfNet System is designed to provide additional
flexibility and convenience to customers by expanding potential coverage by the
Company's ESLs to the entire store and allowing the retailer to change store
placement of the ESLs more easily. The Company believes that the cost of
installing and maintaining its wireless ESLs will be lower than that of its
current ESL system, which requires the wiring of store aisles.
LETTERS OF INTENT
ERS has signed a non-binding Letter of Intent with the Overwaitea Food
Group providing for installation of the ERS ShelfNet System in approximately 60
supermarkets beginning in 1997. The Company also is pursuing other such
arrangements with other leading U.S. supermarket operators. The Letter of Intent
is, and all such additional arrangements, if any, will be, subject to numerous
conditions, including negotiation and execution of definitive contract terms.
See "Business -- Marketing and Sales" for a description of the terms to be
proposed initially by the Company.
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock and
the contemporaneous private placement of Common Stock to subscribers, including
members of the Company's Board of Directors (the "Board of Directors") and their
affiliates. In January 1997, the Company raised approximately $95 million in net
proceeds as a result of the Private Placement (as defined).
<PAGE> 11
3
BUSINESS STRATEGY
The Company's strategy is to achieve increasing recurring revenue
through greater market penetration of the ERS ShelfNet System. The Company
intends to focus its initial marketing efforts under the Tolling Plan on the
supermarket sector of the retail industry, to continue to reduce the
manufacturing costs of the system to improve the Company's profitability and to
continue to enhance, develop and support value-added applications of the ERS
ShelfNet System.
- Tolling Plan. The Company believes that its Tolling Plan will
facilitate more rapid market acceptance of the ERS ShelfNet
System because it does not require an initial cash investment
by the customer. The Company intends to use a portion of the
proceeds from the Private Placement (as defined) to install
the ERS ShelfNet System in the supermarkets covered by the
Letter of Intent and for other retailers under the Tolling
Plan.
- Initial Focus on Supermarket Sector. The Company intends
initially to focus its marketing efforts on the supermarket
sector because of the Company's established relationships with
supermarket chains and the installed base of the ERS ShelfNet
System in supermarkets, as well as the Company's belief that
supermarket operators generally are more receptive than other
retailers to utilizing technology to reduce operating costs
and improve productivity. The Company estimates that, as of
September 30, 1996, of the approximately 29,800 supermarkets
in the United States, approximately 115 stores were operating
ESL systems.
- Reduce Manufacturing Costs. The Company intends to continue
its efforts to reduce the cost of manufacturing its wireless
ESLs through the application of established chip manufacturing
techniques to the ESL's integrated circuit, the integration of
various components in the ESL and the achievement of
significant economies of scale expected as a result of the
higher manufacturing volumes the Company believes will arise
from the implementation of the Tolling Plan.
- Value-Added Applications. In order to increase the appeal of
the Company's system to prospective customers (by increasing
the level of potential cost savings and benefits) and to
encourage existing customers to adopt the enhanced system (and
install additional systems), the Company intends to develop
additional applications for, and enhance existing applications
of, the ERS ShelfNet System.
HISTORY
ERS was founded in 1990 by Norton Garfinkle, the Company's Chairman of
the Board, and Bruce F. Failing, Jr., the Company's Vice Chairman of the Board
and Chief Executive Officer, to develop and supply ESL systems to retailers. Mr.
Failing previously co-founded and served as President of Actmedia, Inc., a
principal provider of in-store marketing products and services, until Actmedia's
sale to Heritage Media Corporation in 1989 for total consideration of
approximately $184 million. Mr. Garfinkle was a significant shareholder, and
served as a director, of Actmedia until its sale. Since inception, the Company
has raised approximately $69 million, excluding the proceeds to the Company from
the Private Placement, in order to develop its system and business, of which
Messrs. Failing and Garfinkle contributed approximately $23 million. The
Company's headquarters is located at 372 Danbury Road, Wilton, Connecticut
06897, telephone (203) 761-7900.
<PAGE> 12
4
THE EXCHANGE OFFER
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Registration Rights Agreement........... The Old Notes were sold by the Company on January 24, 1997, to the
Initial Purchasers (as defined), who placed (the "Private Placement")
the Old Notes with institutional investors as part of units
(collectively, the "Units") comprised of $1,000 principal amount at
maturity of Old Notes and one warrant (collectively, the "Warrants") to
purchase 17.23 shares of the common stock, $.01 par value ("Common
Stock"), of the Company. In connection therewith, the Company executed
and delivered for the benefit of the holders of the Old Notes the
Registration Rights Agreement (as defined) providing, among other
things, for the Exchange Offer.
The Exchange Offer...................... New Notes are being offered in exchange for an equal principal amount at
maturity of Old Notes. As of the date hereof, $147,312,000 aggregate
principal amount at maturity of Old Notes are outstanding. Since the
New Notes will be recorded in the Company's accounting records at the
same carrying value as the Old Notes, no gain or loss will be recognized
by the Company upon the consummation of the Exchange Offer. See "The
Exchange Offer -- Accounting Treatment." Holders of the Old Notes do
not have appraisal or dissenter's rights in connection with the Exchange
Offer under the Delaware General Corporation Law or the Indenture in
connection with the Exchange Offer.
Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Company believes that a
holder who exchanges Old Notes for New Notes pursuant to the Exchange
Offer may offer for resale, resell and otherwise transfer such New Notes
without compliance with the registration and prospectus delivery
requirements of the Securities Act; provided that (i) such New Notes are
acquired in the ordinary course of such Holder's business, (ii) such
holder is not engaged in, and does not intend to engage in, a
distribution of such New Notes and has no arrangement with any person to
participate in the distribution of such New Notes, and (iii) such holder
is not an affiliate of the Company (as defined under Rule 405 of the
Securities Act). However, the staff of the Commission has not considered
the Exchange Offer in the context of a no-action letter and there can be
no assurance that the staff of the Commission would make a similar
determination with respect to the Exchange Offer as in such other
circumstances. Each broker-dealer that receives New Notes for its own
account in exchange for Old Notes, where such Old Notes were acquired by
such broker-dealer as a result of market-making activities or other
trading activities, must acknowledge that it will deliver a prospectus in
connection with any resale of such new Notes. See "Plan of Distribution."
Acceptance of Old Notes and Delivery of
New Notes.......................... Subject to certain conditions, the Company will accept for exchange any
Old Notes which are properly tendered in the Exchange Offer prior to
5:00 P.M., New York City time, on the Expiration Date. The New Notes
issued pursuant to the Exchange Offer will be delivered promptly
following the Expiration Date. See "The Exchange Offer -- Terms of the
Exchange Offer."
Expiration Date......................... 5:00 P.M., New York City time, on ____________, 1997 (30 days following
the commencement of the Exchange Offer), unless the Exchange Offer is
extended, in which case the term "Expiration Date" means the latest date
and time to which the Exchange Offer is extended.
</TABLE>
<PAGE> 13
5
<TABLE>
<S> <C>
Conditions to the Exchange Offer........ The Exchange Offer is subject to certain customary conditions, which may
be waived by the Company. See "The Exchange Offer -- Conditions."
Except for the requirements of applicable Federal and state securities
laws, there are no Federal or state regulatory requirements to be
complied with or obtained by the Company in connection with the Exchange
Offer. NO VOTE OF THE COMPANY'S SECURITYHOLDERS IS REQUIRED TO EFFECT
THE EXCHANGE OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT
HEREBY.
Procedures for Tendering................ Each holder of Old Notes wishing to accept the Exchange Offer must
complete, sign and date the Letter of Transmittal, or a facsimile
thereof, in accordance with the instructions contained herein and
therein, and mail or otherwise deliver such Letter of Transmittal, or
such facsimile, together with the Old Notes to be exchanged (unless such
tender is being effected pursuant to the procedure for book-entry
transfer described herein) and any other required documentation to the
Exchange Agent (as defined) at the address set forth herein and
therein. See "The Exchange Offer -- Procedures for Tendering."
Withdrawal Rights....................... Tenders of Old Notes may be withdrawn at any time prior to 5:00 P.M.,
New York City time, on the Expiration Date. To withdraw a tender of Old
Notes, a written or facsimile transmission notice of withdrawal must be
received by the Exchange Agent at its address set forth below under
"Exchange Agent" prior to 5:00 P.M., New York City time, on the
Expiration Date.
Untendered Old Notes.................... Holders of Old Notes whose Old Notes are not exchanged for New Notes
pursuant to the Exchange Offer, will continue to be subject to the
existing restrictions upon transfer contained in the legend thereon. In
general, the Old Notes may not be offered for resale or resold, unless
registered under the Securities Act, except pursuant to an exemption
from, or in a transaction not subject to, the Securities Act and
applicable state securities laws. See "Risk Factors -- Consequences of
Failure to Exchange" and "Description of the Notes -- Exchange Offer;
Registration Rights."
Exchange Agent.......................... United States Trust Company of New York, the Trustee under the
Indenture, is serving as exchange agent (the "Exchange Agent") in
connection with the Exchange Offer.
Accounting Treatment.................... No gain or loss for accounting purposes will be recognized by the
Company upon the consummation of the Exchange Offer. See "The Exchange
Offer -- Accounting Treatment."
Use of Proceeds......................... There will be no cash proceeds to the Company from the issuance of the
New Notes pursuant to the Exchange Offer.
</TABLE>
THE NOTES
The Exchange Offer relates to the exchange of up to $147,312,000
aggregate principal amount at maturity of Old Notes for up to an equal aggregate
principal amount at maturity of New Notes. The New Notes will be obligations of
the Company evidencing the same indebtedness as the Old Notes, and will be
entitled to the benefits of the same Indenture. The form and terms of the New
Notes are generally the same as the form and terms of the Old Notes, except that
the New Notes have been registered under the Securities Act and therefore will
not bear legends restricting the transfer thereof. See "Description of the New
Notes."
<PAGE> 14
6
COMPARISON OF OLD NOTES WITH NEW NOTES
<TABLE>
<S> <C>
Freely Transferable..................... Generally, the New Notes will be freely transferable under the
Securities Act by holders who are not affiliates of the Company. The
New Notes otherwise will be substantially identical in all material
respects (including interest rate and maturity) to the Old Notes. See
"The Exchange Offer -- Terms of the Exchange Offer."
Registration Rights..................... The holders of Old Notes currently are entitled to certain registration
rights pursuant to a registration rights agreement (the "Registration
Rights Agreement") dated as of January 20, 1997, between the Company and
the Initial Purchasers (as defined). However, upon consummation of the
Exchange Offer, subject to certain exceptions, holders of Old Notes who
do not exchange their Old Notes for New Notes in the Exchange Offer will
no longer be entitled to registration rights and will not be able to
offer for resale or resell their Old Notes, unless such old Notes are
subsequently registered under the Securities Act (which, subject to
certain limited exceptions, the Company will have no obligation to do),
except pursuant to an exemption from, or in a transaction not subject
to, the Securities Act and applicable state securities laws. See "Risk
Factors -- Consequences of Failure to Exchange."
TERMS OF THE NEW NOTES:
Maturity Date........................... February 1, 2004.
Yield and Interest...................... 13-1/4% per annum (computed on a semi-annual bond equivalent basis).
Except as described herein, no cash interest will accrue on the Notes
prior to February 1, 2000. The Notes will begin to accrue cash interest
on February 1, 2000, and cash interest will be payable thereafter on
February 1 and August 1 of each year, commencing August 1, 2000.
Sinking Fund............................ None.
Original Issue Discount................. The Old Notes were issued with original issue discount requiring holders
of the New Notes to include such OID in gross income for U.S. federal
income tax purposes in advance of the receipt of the cash payments to
which such income is attributable. See "Certain Federal Income Tax
Consequences".
Optional Redemption..................... The Notes may not be redeemed at the option of the Company prior to
February 1, 2001. The Notes may be redeemed by the Company at any time
and from time to time on or after February 1, 2001, at the redemption
prices set forth herein.
Ranking................................. The New Notes will be senior, unsecured obligations of the Company
ranking pari passu in right of payment of principal and interest with
all other existing and future senior unsecured obligations of the
Company and will rank senior to all future subordinated debt of the
Company. However, the CDA Note is secured by the assets of the Company
and the Principal Subsidiary.
Restrictive Covenants................... The Indenture (as defined) under which the New Notes will be issued
contains certain covenants which, among other things, limits (a) the
incurrence of additional indebtedness by the Company and its Restricted
Subsidiaries and the issuance of preferred stock by the Company's
Restricted Subsidiaries, (b) the payment of dividends on capital stock
of the Company and the purchase, redemption or retirement of capital
stock or subordinated indebtedness, (c) certain investments, (d) certain
transactions with affiliates, (e) the incurrence of liens and sale and
leaseback transactions, (f) sales of assets, including capital stock of
subsidiaries, (g) certain consolidations and mergers and (h) the
Company's lines
</TABLE>
<PAGE> 15
7
<TABLE>
<S> <C>
of business. The Indenture also prohibits certain restrictions on
distributions from subsidiaries. All of these limitations and
prohibitions, however, are subject to a number of important
qualifications. See "Description of the Notes -- Certain Covenants."
Change of Control....................... Upon a Change of Control, each Holder shall have the right to require
the Company to purchase all or any part of such Holder's Notes at a
purchase price in cash equal to 101% of the Accreted Value thereof, plus
accrued and unpaid interest, if any, to the date of purchase.
</TABLE>
RISK FACTORS
Prospective participants in the Exchange Offer should consider
carefully the information set forth under "Risk Factors" and all other
information set forth in this Prospectus before making any investment in the
Securities.
<PAGE> 16
8
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND CERTAIN OTHER DATA
The following tables reflect summary historical consolidated financial
and certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
The following summary historical consolidated statement of operations
data, insofar as it relates to each of the years 1991-1995, has been derived
from audited annual consolidated financial statements, including the
consolidated statement of operations for the three years ended December 31, 1995
and the notes thereto included elsewhere in this Prospectus. The summary
historical consolidated statement of operations data for the nine months ended
September 30, 1995 and 1996 and the summary historical consolidated balance
sheet data as of September 30, 1996 have been derived from unaudited condensed
consolidated financial statements also included elsewhere in this Prospectus and
which, in the opinion of management, include all adjustments, consisting only of
normal recurring adjustments, necessary for a fair statement of the results for
the unaudited interim periods. The unaudited interim period results are not
necessarily indicative of the results to be expected for the full year. For a
discussion of factors affecting the comparability of this data, see "Selected
Historical Consolidated Financial and Certain Other Data".
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- ---------------------
1991 1992 1993(1) 1994 1995 1995 1996
---- ---- ------- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues ........................ $ 102 $ 941 $ 1,122 $ 2,376 $ 2,973 $ 1,903 $ 4,270
Loss from operations ............ (5,685) (9,420) (16,518) (11,324) (10,717) (8,159) (6,424)
Net loss(2) ..................... (6,206) (9,533) (15,997) (11,278) (10,868) (8,295) (6,528)
Net loss per common share(3) .... -- -- (1.40) (0.97) (0.95) (0.72) (0.47)
Weighted average number of common
shares outstanding(4) ........ -- -- 11,461 11,682 11,743 11,741 14,528
</TABLE>
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
--------------------------
ACTUAL AS ADJUSTED(5)
------ --------------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital $12,091 $107,091
Total assets 14,465 114,465
Long-term debt 4,987 99,887
Warrants to purchase common stock -- 5,100
Stockholders' equity 8,596 8,596
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
-------------------------------------------------------- ---------------------
1991 1992 1993(1) 1994 1995 1995 1996
---- ---- ------- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6) ...................... $(5,556) $ (8,371) $(15,290) $(10,839) $(10,114) $ (7,735) $ (5,706)
Cash flows from operating
activities .................. (5,267) (8,133) (11,855) (10,026) (11,160) (8,253) (6,327)
Cash flows from investing
activities .................. (449) (324) (8,641) 6,737 100 662 (758)
Cash flows from financing
activities .................. 5,633 12,866 18,606 1,901 13,139 11,935 13,526
Depreciation and amortization .. 140 240 367 374 463 337 539
Capital expenditures ........... 449 324 574 303 452 287 245
Deficiency of earnings to fixed
charges(7) .................. (6,206) (10,364) (16,420) (11,278) (10,868) (8,295) (6,528)
Pro forma deficiency of earnings
to fixed charges(8) ......... -- -- -- -- (26,000) -- (17,767)
Stores with ERS ShelfNet System
installed at end of period .. -- 7 13 21 42 33 64
</TABLE>
- ---------------------------
<PAGE> 17
9
(1) Reflects the consummation of the combination of the Company, the Principal
Subsidiary, which was incorporated in Connecticut in 1990, and ERS
Associates Limited Partnership (the "Partnership"), which was organized in
Connecticut in 1992 in order to continue the business and hold the
principal assets of the Principal Subsidiary, immediately prior to the
closing of the Company's initial public offering (the "Initial Public
Offering") of Common Stock on May 7, 1993. This combination is herein
referred to as the "Combination". References to historical financial
information of the Company prior to the date of the Combination refer to
the historical financial information of the Principal Subsidiary. See Note
3 of the Notes to the Company's Consolidated Financial Statements included
elsewhere in this Prospectus.
(2) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(3) Net loss per common share data for periods prior to December 31, 1993 has
not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common share equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not reflect
common share equivalents that are anti-dilutive.
(5) As adjusted to give effect to the Private Placement and the application of
the net proceeds therefrom.
(6) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because the Company believes it is a
widely accepted financial indicator of an entity's ability to incur and
service debt. EBITDA should not be considered by an investor as an
alternative to net income or income from operations, as an indicator of the
operating performance of the Company or other consolidated operations or
cash flow data prepared in accordance with generally accepted accounting
principles, or as an alternative to cash flows as a measure of liquidity.
For the years ended December 31, 1993 and 1994, EBITDA included non-cash
charges for stock option compensation expense of $7.5 million and $1.1
million, respectively; for the year ended December 31, 1995 and for the
nine months ended September 30, 1995 and 1996, such amounts were not
material.
(7) For purposes of determining the deficiency of earnings to fixed charges,
"earnings" consist of earnings before fixed charges and "fixed charges"
consist of interest on all debt and that portion of rental expense that the
Company believes to be representative of interest.
(8) The pro forma deficiency of earnings to fixed charges, as adjusted to give
effect to the Private Placement and the application of the net proceeds
therefrom.
<PAGE> 18
10
RISK FACTORS
Prospective participants in the Exchange Offer should carefully
consider the risk factors set forth below, as well as the other information
appearing in this Prospectus, before tendering their Old Notes in the Exchange
Offer. The risk factors set forth below (other than "Consequences of Failure to
Exchange") are generally applicable to the New Notes as well as the Old Notes.
This Prospectus contains forward-looking statements which involve risks and
uncertainties. The Company's actual results may differ significantly from the
results discussed in the forward-looking statements. Factors that might cause
such differences include, but are not limited to, the following risk factors.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such Old
Notes will continue to be subject to the restrictions on transfer contained in
the legend thereon as a consequence of the issuance of the Old Notes pursuant to
exemptions from, or in transactions not subject to, the registration
requirements of the Securities Act and applicable state securities laws. In
general, the Old Notes may not be offered for resale or resold, unless
registered under the Securities Act, except pursuant to an exemption from, or in
a transaction not subject to, the Securities Act and applicable state securities
laws. The Company does not intend to register the Old Notes under the Securities
Act. Based on interpretations by the staff of the Commission, as set forth in
no-action letters issued to third parties, the Company believes that a holder
who exchanges Old Notes for New Notes pursuant to the Exchange Offer may offer
for resale, resell and otherwise transfer such New Notes without compliance with
the registration and prospectus delivery requirements of the Securities Act;
provided that (i) such New Notes are acquired in the ordinary course of such
Holder's business, (ii) such holder is not engaged in, and does not intend to
engage in, a distribution of such New Notes and has no arrangement with any
person to participate in the distribution of such New Notes, and (iii) such
holder is not an affiliate of the Company (as defined under Rule 405 of the
Securities Act). However, the staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution." The New Notes may not be offered or
sold unless they have been registered or qualified for sale under applicable
state securities laws or an exemption from registration or qualification is
available and is complied with. The Company is required, under the Registration
Rights Agreement, to register the New Notes in any jurisdiction requested by the
holders, subject to certain limitations. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected.
RELIANCE ON SINGLE PRODUCT IN EMERGING MARKET
For the foreseeable future, the Company's revenues, if any, will be
derived entirely from the ERS ShelfNet System. The market for ESL systems, such
as the ERS ShelfNet System, is in the development stage, and market acceptance
of, and demand for, these systems are subject to a high level of uncertainty.
The Company's success will be dependent upon, among other things, the extent to
which retailers choose to install ESL systems. The demand for such systems may
be affected by numerous factors, many of which are beyond the Company's control,
including the
<PAGE> 19
11
actual savings and benefits experienced by the individual supermarket stores
using the ESL system. See " -- Use of Assumptions to Estimate Net Cost Savings
and Benefits." There can be no assurance that supermarket chains will choose to
install ESL systems in a significant number of their stores. If the ERS ShelfNet
System fails to generate adequate operating cash flows, whether as a result of
lack of market acceptance, the Company's inability to place or service the
system, the failure of the system to perform as expected, the obsolescence of
the system or otherwise, the Company will be unable to pay the principal of or
interest on the Notes, and the Warrants may become worthless. See " --
Introduction of Enhanced System".
INTRODUCTION OF ENHANCED SYSTEM
In December 1996, ERS announced that, in the first quarter of 1997, it
plans to introduce enhancements to the ERS ShelfNet System that provide spread
spectrum microwave transmission of data directly to wireless ESLs. Although
laboratory testing of the enhanced system is complete and field testing of the
enhanced system hardware has been initiated, there can be no assurance that the
enhanced ERS ShelfNet System will be introduced as proposed, will function
successfully over time in actual retail usage or will result in the lower costs
of manufacturing, installing and maintaining the system that the Company
anticipates. In addition, although laboratory testing of the value-added
applications of the enhanced system has been completed, there can be no
assurance that such applications will function in actual retail usage. If the
enhanced ERS ShelfNet System or its applications fail to perform as expected,
the Company's business and results of operations would be materially adversely
affected.
The planned introduction of the enhanced ERS ShelfNet System could
affect the Company's ability to sell on-hand inventories of the current system
and could affect the recoverability of the book value of such inventory and
certain related assets. Although the unrecoverable amount of such assets is not
currently known, it may represent a significant portion of the Company's present
inventories.
USE OF ASSUMPTIONS TO ESTIMATE NET COST SAVINGS AND BENEFITS
As noted above, demand for the ERS ShelfNet System will be affected by,
among other things, the actual savings and benefits experienced by the
individual stores using the ERS ShelfNet System. Estimates of the potential for
such savings and benefits used in this Prospectus are based on a number of
assumptions made by the Company, including, for example, the assumed average
cost of labor, other assumed average supermarket operating data and the assumed
usage of the system's applications by retailers. Because the market for ESL
systems is in the development stage, these estimates are based on information
and studies which may not be representative of the overall retail market for ESL
systems and may overstate the cost savings and benefits that retailers are able
to achieve in actual practice. Moreover, these estimates are not based on actual
results obtained by any particular retailer using the ERS ShelfNet System and
are inherently subject to business and economic uncertainties. There can be no
assurance, therefore, that the estimated cost savings and benefits will actually
be achieved by any particular retailer or by any particular group of retailers,
and prospective purchasers of the Securities are cautioned not to place undue
reliance upon these estimates. The actual cost savings and benefits may vary
significantly from the Company's estimates used in this Prospectus. To the
extent that retailers are not able to achieve the anticipated cost savings and
benefits, the appeal of the ERS ShelfNet System will be adversely affected.
HISTORICAL AND ANTICIPATED LOSSES AND NEGATIVE CASH FLOW
The Company has never been profitable and has incurred significant net
operating losses and negative cash flow from operations to date in connection
with developing, designing and market testing its ESL systems. As of September
30, 1996, the Company had a cumulative net loss of approximately $62.9 million
(which includes non-cash charges in the amount of $8.6 million for stock option
compensation expense). See "Selected Historical Consolidated Financial and
Certain Other Data". Losses and negative cash flow from operations will continue
while the Company concentrates on such activities and until it has established a
sufficient revenue-generating customer base, if ever. See "Management's
Discussion and Analysis of Financial Condition and Results of Operations --
Liquidity and Capital Resources" regarding anticipated decreases in revenue for
the fourth quarter of 1996. There can be no assurance that an adequate revenue
base will be established or that sales of the Company's products and services
will generate positive cash flow from operations. If the Company is not able to
generate profits and positive
<PAGE> 20
12
cash flow in the next few years, the Company will most likely be unable to pay
the principal of or interest on the Notes, and the Warrants may become
worthless.
LETTER OF INTENT; ABILITY TO OBTAIN FIRM COMMITMENTS
The Company intends to continue using a majority of the proceeds of the
Private Placement to provide the capital necessary to permit the Company to
offer the ERS ShelfNet System pursuant to the Tolling Plan, whereby the Company
will own the ERS ShelfNet System and provide it to retailers on a fee basis.
Although the Company has entered into the Letter of Intent which contemplates
the installation of the ERS ShelfNet System in approximately 60 stores, the
Letter of Intent is not a binding obligation and, in any case, is subject to
numerous conditions, including the negotiation and execution of a definitive
contract. There can be no assurance that the arrangements contemplated by the
Letter of Intent will be consummated.
Even if the Company provides the ERS ShelfNet System to the stores
contemplated by the Letter of Intent, the Company may not be able to obtain
other customers or install systems in more stores pursuant to the Tolling Plan
or otherwise. In addition, under the Tolling Plan a customer may elect to
terminate its usage of the ERS ShelfNet System after only one year. If the
Company is not able to consummate the arrangements contemplated by the Letter of
Intent or if the Company is not able to obtain other significant contracts to
provide the ERS ShelfNet System or if the use of the ERS ShelfNet System is
terminated by its customers after only an initial period, the Company's business
and results of operations will be materially adversely affected.
SUBSTANTIAL LEVERAGE; DEBT SERVICE REQUIREMENTS
As a result of the Private Placement, the Company is highly leveraged
with indebtedness that is substantial in relation to its stockholders' equity.
On a pro forma basis as of September 30, 1996, the Company had an estimated
total outstanding indebtedness of approximately $99.9 million, including $94.9
million with respect to the Notes, and the Company would have had total
stockholders' equity of $8.6 million. On a pro forma basis, after giving effect
to the Private Placement as if the Private Placement had occurred on January 1,
1995, for the year ended December 31, 1995, and on January 1, 1996, for the nine
months ended September 30, 1996, the Company's earnings would have been
insufficient to cover fixed charges by $26.0 million and $17.8 million,
respectively.
The Company's high degree of leverage could have important consequences
to holders of the Notes, including that (i) a substantial portion of the
Company's cash flow from operations, if any, after February 1, 2000, will be
required to be dedicated to the Company's interest expense obligations and may
not be available to the Company for its operations, working capital, capital
expenditures or other purposes, (ii) the Company's ability to obtain financing
in the future may be limited, (iii) the Company's flexibility to adjust to
changing market conditions and ability to withstand competitive pressures as
compared to less highly-leveraged competitors could be limited (including by
reason of the covenants contained in the Indenture), and (iv) the Company may be
more vulnerable to downturns in general economic conditions or in its business
or be unable to undertake capital expenditures that are important for its growth
strategy, any of which could have a material adverse effect on the Company and
its ability to make payments of principal of, and interest on, the Notes.
Since inception, the Company has not generated positive cash flow from
operations. As a result, the Company has been required to pay its fixed charges
(including interest on existing indebtedness) and operating expenses with the
proceeds from sales of its equity securities, loans from stockholders and other
credit arrangements. With the issuance of the Notes, as of February 1, 2000, the
Company will be required to satisfy substantially higher periodic cash debt
service obligations. Commencing August 1, 2000, cash interest on the Notes will
be payable semi-annually at the rate of 13-1/4% per annum (approximately $19.5
million per year). The full accreted principal amount at maturity of the Notes
of $147,312,000 will become due on February 1, 2004.
The Company's ability to make scheduled payments or to refinance its
obligations with respect to the Notes (including its obligation to purchase the
Notes at 101% of the Accreted Value plus accrued and unpaid interest, if any, at
the time of a Change of Control (as defined in the Indenture)) and its other
indebtedness will ultimately depend on its financial and operating performance,
which in turn is subject to prevailing economic and
<PAGE> 21
13
competitive conditions and to certain financial, business and other factors that
may be beyond its control, including operating difficulties, increased operating
costs, prices it can charge its customers, the response of competitors,
regulatory developments and delays in implementing its strategy. The Company's
ability to meet its debt service and other obligations will depend largely on
the extent to which the Company can implement successfully its business strategy
of achieving large-scale commercialization of the ERS ShelfNet System. There can
be no assurance that the Company will be able to implement fully its strategy or
that the anticipated results of its strategy will be realized. There can be no
assurance that the Company will be able to generate sufficient cash flow or
otherwise obtain funds in the future to cover interest and principal payments
associated with the Notes and any other debt of the Company and its
subsidiaries. See "Business -- Business Strategy".
In the event the Company is unable to meet its obligations with respect
to its existing indebtedness, it may be required to reduce or delay capital
expenditures, refinance or restructure all or a portion of its indebtedness,
sell material assets or operations or seek to raise additional debt or equity
capital. There can be no assurance that the Company will be able to effect any
such refinancing or restructuring or sell assets or obtain any such additional
capital on satisfactory terms or at all, or that the Company's cash flow and
capital resources will be sufficient for payment of interest on and principal of
its indebtedness in the future. See "Management's Discussion and Analysis of
Financial Condition and Results of Operations -- Liquidity and Capital
Resources" and "Description of the Notes -- Limitation on Sales of Assets and
Subsidiary Stock".
RANKING OF NOTES; HOLDING COMPANY STRUCTURE
The Notes are not secured and, therefore, will be effectively
subordinated to all existing and future secured indebtedness of the Company to
the extent of the value of the assets securing such indebtedness. As of
September 30, 1996, and without giving pro forma effect to the Private
Placement, the Company had $5.0 million of secured indebtedness outstanding,
consisting solely of the CDA Note. Subject to certain conditions specified
therein, the Indenture permits the Company and its subsidiaries to incur
additional indebtedness, including capital lease obligations and secured
indebtedness, which obligations and secured indebtedness will rank senior to the
Notes to the extent of the assets subject thereto. See "Description of the
Notes".
In addition, the Company is a holding company and conducts
substantially all of its operations through subsidiaries. As such, the Company
has no substantial source of operating cash flow other than from dividends and
distributions from its subsidiaries. Therefore, the Company's ability to make
required principal and interest payments with respect to the Company's
indebtedness (including the Notes) and other obligations depends on the earnings
of its subsidiaries and on its ability to receive funds from its subsidiaries
through dividends or other payments. Although the Indenture prohibits the
Company from causing the imposition of or permitting to exist any restrictions
on the ability of its subsidiaries to make such distributions, there can be no
assurance that other factors, including legal or regulatory restrictions, will
not limit the ability of such subsidiaries to make such distributions in the
future. Although each of the Company's subsidiaries, at such future time as it
incurs certain indebtedness, may be required to guarantee the Company's
obligations under the Notes, any such guarantee is subject to certain
limitations and such subsidiary's liability under its guarantee could be reduced
to zero. See " -- Fraudulent Conveyance" and "Description of the Notes --
Certain Covenants -- Future Guarantors" and " -- Certain Definitions". To the
extent that any subsidiary that does not guarantee the Company's obligations
under the Notes is subject to or incurs indebtedness and becomes insolvent or is
liquidated, secured and unsecured creditors of such subsidiary would be entitled
to payment from the proceeds of such subsidiary's assets before the Company and
its creditors would derive any value from such subsidiary's assets. Furthermore,
because any such guarantees by the Company's subsidiaries will be unsecured, the
secured creditors of any such subsidiary would be entitled to payment from such
proceeds before the Company and its creditors would derive any value from such
subsidiary's assets. As of September 30, 1996, after giving pro forma effect to
the Private Placement, the Company's subsidiaries (including the Principal
Subsidiary, as co-borrower under the CDA Note) had in the aggregate $5.0 million
of long-term indebtedness outstanding (exclusive of (i) the Notes and (ii)
indebtedness to the Company in the amount of $37 million), all of which was
secured. The Company's subsidiaries may incur additional indebtedness in the
future, subject to certain restrictions imposed by the Indenture. See
"Description of the Notes -- Certain Covenants".
<PAGE> 22
14
COMPETITION AND TECHNOLOGICAL CHANGE
The Company believes that the only ESL system suppliers offering a
product currently competing with the Company's system in the United States are
Telepanel Systems Inc. ("Telepanel") of Markham, Ontario, Canada, Pricer, Inc.
of Norwalk, Connecticut, a subsidiary of Pricer AB ("Pricer") of Uppsala, Sweden
and, recently, NCR Corporation ("NCR"). However, the emerging market for ESL
systems is characterized by rapid technological advances and evolving industry
standards and is subject to a high degree of potential competition. As a result,
the Company has been and will continue to be required to make substantial
expenditures for engineering and development. Telepanel has publicly reported
the existence of an arrangement with IBM whereby IBM may market the Telepanel
system. Additionally, other companies that are larger than the Company and have
greater financial and other resources than the Company may attempt to develop or
market competing ESL systems. No assurance can be given that other companies,
such as other vendors of POS systems, including Fujitsu-ICL, will not enter the
market in which the Company competes or that the Company will have the resources
required to respond to technological changes or to compete successfully in the
future. The Company's ESL system is also subject to competition from vendors
selling traditional paper labeling methods, as well as providers of hand-held
portable data terminals. See "Business -- Competition".
PROTECTION OF INTELLECTUAL PROPERTY
The Company's ability to compete effectively will depend, in part, on
the competitive advantage it enjoys as a result of its intellectual property,
and thus on its ability to continue to protect its intellectual property. The
Company relies principally upon patent and copyright protection and its trade
secret program to protect its proprietary technology. There can be no assurance
that any additional patents will be issued as a result of any applications made
by the Company therefor or that claims allowed under such patents or any
existing patents will not be challenged or invalidated or will be of adequate
scope to protect the Company's technology. The Company also relies on
non-disclosure agreements with its employees, customers and consultants and
other parties. There can be no assurance that such measures will be adequate to
protect the Company's intellectual property. Although the Company believes that
its products and technology do not infringe on the proprietary rights of others,
there can be no assurance that third parties will not assert infringement claims
in the future or that such claims will not be successful. In any case, the
Company could incur substantial costs in defending itself in patent infringement
suits brought by others and in prosecuting suits against patent infringers. See
"Business -- Intellectual Property" and "Business -- Legal Proceedings".
DEPENDENCE ON SUPPLIERS AND CONTRACT MANUFACTURERS
The Company does not manufacture any of the hardware components of the
ERS ShelfNet System and is solely dependent upon third parties to manufacture
and assemble components comprising the ERS ShelfNet System on a purchase order
basis. The Company does not have written long-term arrangements with such
contract manufacturers. In addition, the Company's ESLs currently incorporate a
microprocessor which is supplied solely by Sanyo Semiconductor Corporation
("Sanyo"). While the Company, on the basis of its familiarity with the design of
such microprocessor and the capabilities of other sources, believes that other
suppliers could produce equivalent microprocessors within approximately four
months of notification by the Company, any inability to obtain microprocessors
from its current supplier in sufficient quantities could result in a temporary
interruption of the Company's production of ESLs and any such replacement
supplier could charge more for such production or produce a lower-quality unit,
thus diminishing the Company's revenues and income from operations. Although the
Company believes that several parties are available to manufacture the
components of its system, the termination of the Company's relationship with one
or more of its contract manufacturers, legal or regulatory changes in any
country in which such manufacturer resides or an extreme loss of property (e.g.,
as a result of a fire, hurricane, etc.) to any such manufacturer may result in a
temporary interruption in the manufacture and assembly of the Company's system
and, thus, in the delay or loss of placements of the ERS ShelfNet System, with a
corresponding loss of revenues. See "Business -- Manufacturing".
<PAGE> 23
15
DEPENDENCE ON SIGNIFICANT CUSTOMERS
During the year ended December 31, 1995, 83% of the Company's revenues
was attributable to purchases by three supermarket chains, and, in 1993 and
1994, 82% and 81%, respectively, of the Company's revenues were attributable to
purchases by two supermarket chains (aggregating four chains for the entire
three year period). The failure of such customers to continue to utilize systems
from the Company could have a material adverse effect on the business of the
Company. The Company's prior arrangements with a principal customer with respect
to proposed sales of the ERS ShelfNet System expired during the fourth quarter
of 1996. Although the Company is engaged in discussions regarding a new
arrangement with such customer and the replacement of an additional supermarket
arrangement relating to system sales, there can be no assurance that any such
arrangements will be consummated. Additionally, customers who account for
significant portions of the Company's revenues may have the ability to negotiate
prices for the Company's products and services that are more favorable to such
customers and that result in lower profit margins for the Company. See "Business
- -- Customers".
ABILITY TO MANAGE GROWTH
If the ERS ShelfNet System is installed in the stores contemplated by
the Letter of Intent and the Company is able to obtain significant orders from
other large retailing chains, the Company will experience rapid growth, which in
turn will place significant pressure on the Company's managerial, operational
and financial resources. To manage its growth, the Company must continue to
implement and improve its operational and financial systems and to expand, train
and manage its employee base, and any inability of the Company to attract and
retain the executive and managerial personnel required by its expanding business
could have a material adverse effect on the Company's business operating results
and financial condition. The Company will also be required to develop and manage
multiple relationships with various customers, business partners and other third
parties. The Company's systems, procedures or controls may not be adequate to
support the Company's operations, and Company management may not be able to
achieve the rapid expansion necessary to exploit potential market opportunities
for the Company's products and services. The Company's future operating results
will also depend on its ability to expand its sales and marketing, and research
and development, organizations, to implement and manage new distribution
channels, to penetrate markets and to expand its support organization.
Furthermore, there can be no assurance that the Company will be successful in
procuring expanded third party sources for the manufacture and assembly of the
components of the ERS ShelfNet System, in expanding the capabilities of its
personnel and subcontractors engaged in the installation and servicing of its
system or in lowering the costs of manufacturing, installing or maintaining its
system. In addition, any anticipated expansion of the Company's marketing
efforts outside of the United States will expose the Company to the economic,
political and regulatory environments within the countries in which the
Company's new and potential customers are located, which may be more restrictive
or burdensome than those in the United States and with which the Company may be
unfamiliar.
DEPENDENCE ON KEY PERSONNEL
The Company is dependent on its ability to recruit, retain and motivate
high quality personnel, including technical employees, competition for whom is
intense. Any inability of new management to adjust quickly to, and perform as
expected in, their respective roles within the Company, or any inability of the
Company to attract and retain personnel with the requisite skills, could have a
material adverse effect on the Company's business, operating results and
financial condition. See "Management".
SUBSTANTIAL RESTRICTIONS AND COVENANTS
The Indenture contains numerous financial and operating covenants,
including, but not limited to, restrictions on the Company's ability to incur
indebtedness, pay dividends, create liens, sell assets, engage in certain
mergers and acquisitions, make investments and enter into new lines of business.
Such covenants could materially limit or exclude potentially profitable
activities in which the Company might otherwise engage. The ability of the
Company to comply with the covenants and other terms of the Indenture, to make
cash payments with respect to the Notes and to satisfy its other debt
obligations will depend on the future performance of the Company. In addition,
in the event of a Change of Control, the Company will be required, subject to
certain conditions, to offer to purchase
<PAGE> 24
16
all outstanding Notes at a price equal to 101% of the Accreted Value of the
Notes at such time plus accrued interest, if any. There can be no assurance that
the Company would be able to raise sufficient funds to meet this obligation. In
the event the Company fails to comply with the various covenants contained in
the Indenture, it would be in default thereunder and the maturity of
substantially all of its long-term debt (including the Notes) could be
accelerated. See "Description of the Notes -- Defaults".
CONTROL BY EXISTING STOCKHOLDERS
Norton Garfinkle, Chairman of the Board and a director of the Company,
together with two affiliated limited partnerships, and Bruce F. Failing, Jr.,
Vice Chairman of the Board and Chief Executive Officer and a director of the
Company, together with a related trust established for the benefit of his
children, beneficially own approximately 53% of the outstanding Common Stock
(without giving effect to any outstanding stock options, convertible securities
and warrants). Messrs. Garfinkle and Failing have entered into an agreement
relating to the voting and disposition of such shares. Accordingly, Messrs.
Garfinkle and Failing, acting together, effectively control the Company and are
currently able to elect all of the Company's directors and to take any other
action requiring majority stockholder approval.
TRANSACTIONS WITH AFFILIATES
A significant source of funds for the Company historically has been
certain credit arrangements with members of the Board of Directors and their
affiliates and the sale of additional shares of its capital stock to such
parties. No such credit arrangements are in effect as of the date of this
Prospectus. In connection with such transactions, the Company has entered into
registration rights agreements with such directors and their affiliates. As a
result of holding the Company's convertible note and warrants, the Connecticut
Development Authority (the "CDA") is also the beneficial owner of in excess of
5% of the outstanding Common Stock. The Company subleases certain premises to a
company owned by Messrs. Garfinkle and Failing and is indebted to the CDA in
accordance with its existing arrangements.
FRAUDULENT CONVEYANCE
Under certain circumstances, subsidiaries of the Company will be
required to guarantee the Company's obligations with respect to the Notes. The
Company believes that any such guarantee will be for proper purposes and in good
faith. See "Description of the Notes -- Certain Covenants -- Future Guarantors".
If a court of competent jurisdiction in a suit by an unpaid creditor or
a representative of creditors (such as a trustee in bankruptcy or a
debtor-in-possession) were to find that, at the time such subsidiary incurred
its obligations under its guarantee, either such subsidiary incurred such
obligations with the intent to hinder, delay or defraud its present or future
creditors, or that it was insolvent or was rendered insolvent by reason of such
incurrence, was engaged or was about to engage in a business or transaction for
which its remaining unencumbered assets constituted unreasonably small capital
to carry on its business or intended to incur, or believed or reasonably should
have believed that it would incur, debts beyond its ability to pay such debts as
they matured, and the indebtedness was incurred for less than reasonably
equivalent value, such court could avoid such subsidiary's obligations under its
guarantee, subordinate such guarantee to any or all other indebtedness of such
subsidiary or take other action detrimental to the holders of the Notes. In that
event, there can be no assurance that any repayment on such guarantee could ever
be recovered by the holders of the Notes. This risk is accordingly particularly
relevant in the case of a potential guarantee of the Notes by the Principal
Subsidiary. Principally as a result of intercompany indebtedness to the Company
of approximately $37 million at September 30, 1996, the Principal Subsidiary
might not currently be solvent (the measure of solvency for these purposes is
discussed below).
The measure of insolvency for purposes of the foregoing will vary
depending upon the law of the jurisdiction in which it is being applied.
Generally, however, an entity would be considered insolvent for these purposes
if, at the time it incurred indebtedness such as a guaranty obligation, either
the sum of its debts was then greater than all of its property at a fair
valuation, or the then fair salable value of its assets was less than the amount
that was then required to pay its probable liabilities on its existing debts
(including contingent liabilities such as
<PAGE> 25
17
guarantee obligations) as they became absolute and matured or if, at any time,
it proved unable to satisfy its liabilities immediately due and payable with its
current cash flow and available assets. Principally as a result of intercompany
debts owed by the Principal Subsidiary to the Company, the Principal Subsidiary
might not currently be solvent on this basis.
ORIGINAL ISSUE DISCOUNT
The Old Notes were issued at a substantial discount from their stated
principal amount at maturity. Consequently, although cash interest on the Notes
will generally not be payable prior to August 1, 2000, original issue discount
("OID") will be includable in the gross income of a holder of the New Notes, for
U.S. federal income tax purposes, in advance of the receipt of such cash
payments on the Notes. See "Certain Federal Income Tax Consequences" for a more
detailed discussion of the U.S. federal income tax consequences of the purchase,
ownership and disposition of the New Notes.
If a case is commenced by or against the Company under federal
bankruptcy law after the issuance of the Notes, the claim of a holder of a Note
with respect to the principal amount at maturity thereof may be limited to an
amount equal to the sum of (i) the imputed initial offering price of such Note
and (ii) that portion of the OID that is not deemed to constitute "unmatured
interest" for purposes of federal bankruptcy law. Any OID that was not amortized
as of any such bankruptcy filing would constitute "unmatured interest".
POTENTIAL LOSS OF NOLS
As of September 30, 1996, the Company had net operating loss
carryforwards ("NOLs") of approximately $42 million for U.S. federal income tax
purposes. These NOLs, if not utilized to offset taxable income in future
periods, will expire between 2008 and 2011. Section 382 of the Internal Revenue
Code of 1986, as amended (the "Code"), and regulations promulgated thereunder,
impose limitations on the ability of corporations to use NOLs, if the
corporation experiences a more than 50% change in ownership during any
three-year period. The Company does not believe that it has experienced an
ownership change between the Initial Public Offering and the date of this
Prospectus, although it is possible that such an ownership change may occur or
be deemed to have occurred as a result of events beyond the control of the
Company (such as transfers of Common Stock by certain stockholders or the
exercise or treatment of warrants, conversion rights or stock options issued by
the Company). In addition, it is possible that the Private Placement itself will
have caused or contributed to an ownership change, as a result of treatment of
either the Notes or the Warrants as stock for purposes of Section 382 of the
Code. There can also be no assurance that the Company will not take additional
actions, such as the issuance of additional stock, that would cause an ownership
change to occur. In addition, the NOLs are subject to examination by the
Internal Revenue Service (the "IRS"), and are thus subject to adjustment or
disallowance resulting from any such IRS examination. Accordingly, prospective
purchasers of the New Notes should not assume the unrestricted availability of
the Company's currently existing or future NOLs, if any, in making their
investment decisions. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations -- Results of Operations -- Income Taxes".
ABSENCE OF PUBLIC TRADING MARKET FOR NOTES
The New Notes will constitute a new issue of securities for which there
is no established trading market and may not be widely distributed. The Initial
Purchasers have informed the Company that they currently intend to make a market
in the New Notes as permitted by applicable laws and regulations; however the
Initial Purchasers are not obligated to do so and may discontinue market making
at any time without notice. The Company does not intend to list the New Notes on
any national securities exchange or to seek the admission thereof to trading in
the Nasdaq Stock Market, and there can be no assurance as to the development of
any market or liquidity of any market that may develop for the New Notes. If a
market for the New Notes does develop, the price of such New Notes may fluctuate
and liquidity may be limited. If a market for the New Notes does not develop,
purchasers may be unable to resell such New Notes for an extended period of
time, if at all.
<PAGE> 26
18
Historically, the market for non-investment grade debt has been subject
to disruptions that have caused substantial volatility in the prices of such
securities. There can be no assurance that the market for the New Notes will not
be subject to similar disruptions. Any such disruptions may have an adverse
effect on holders of the New Notes.
See " -- Investment Company Act Considerations" for a description of
certain risks associated with the Company being determined to be an "investment
company".
INVESTMENT COMPANY ACT CONSIDERATIONS
The Investment Company Act of 1940, as amended (the "1940 Act"),
requires the registration of, and imposes various substantive restrictions on,
certain companies ("investment companies") that are, or hold themselves out as
being, engaged primarily, or propose to engage primarily, in the business of
investing, reinvesting or trading in securities, or that fail certain
statistical tests regarding composition of assets and sources of income and are
not primarily engaged in businesses other than investing, reinvesting, owning,
holding or trading securities. As a result of the receipt and investment of the
proceeds of the Private Placement a majority of the Company's assets will be
invested in investment securities (as defined in the 1940 Act), and the Company
may be deemed to be an investment company.
In order to clarify the Company's status under the 1940 Act, the
Company applied on January 15, 1997 (the "Application") to the Commission for an
order under Section 3(b)(2) of the 1940 Act declaring that the Company is
primarily engaged in a business other than that of investing, reinvesting,
owning, holding or trading in securities and in the alternative for an order
under Section 6(c) of the 1940 Act exempting the Company from all provisions of
the 1940 Act. Since the filing of the Application, the Company has automatically
been exempt from regulation under the 1940 Act, and will continue to be exempt
for a period of 60 days from such filing, as provided under Section 3(b)(2) of
the 1940 Act. The Company does not intend to register as an investment company
in reliance upon this temporary exemption and in the expectation that an
exemptive order will be granted. However, there is no assurance that any such
order will be granted or if granted will be granted prior to the expiration of
such 60 day period. The staff of the SEC has informed the Company that it is the
policy of the Commission not to take enforcement action for failure to register
as an investment company following the expiration of the 60 day automatic
exemption if a Company's bona fide application for an exemptive order is
pending.
Any order that may be granted may be conditioned on, among other
things, (i) the Company limiting the nature of the securities in which the
proceeds of the Private Placement are invested, which would be likely to result
in the Company obtaining lower yields on the funds invested than might be
available in the securities markets generally, (ii) compliance with Sections 9,
17(a), 17(d), 17(e), 17(f) and Sections 36-53 of the 1940 Act and the rules and
regulations thereunder as if the Company were a registered investment company,
and (iii) disclosure in the Company's reports required to be filed under the
Exchange Act that any such order has been granted and that the Company is
subject to certain provisions of the 1940 Act and the rules and regulations
thereunder as if it were a registered investment company. In addition, the
duration of any such order may be limited to a period of two years from the date
of the filing of the Application and therefore may require the Company to reduce
its holdings of securities and investment securities by January 15, 1999, so
that the Company would no longer be considered an investment company under
Section 3(a) of the 1940 Act. Because the rate at which the proceeds of the
Private Placement will be expended depends in part on circumstances not within
the Company's control, there is no assurance that this timetable will be met.
If the Company were required to register as an investment company under
the 1940 Act, it would become subject to substantial regulation with respect to
its capital structure, management, operations, transactions with affiliated
persons (as defined in the 1940 Act) and other matters in addition to any such
regulations that may apply as a result of the conditions discussed above that
may be imposed by any exemptive order issued by the Commission. Application of
all provisions of the 1940 Act to the Company would have a material adverse
effect on the Company. In the event that an exemptive order is not granted by
the SEC or expires prior to the time the Company would no longer be considered
an investment company under Section 3(a) of the 1940 Act, the Company
<PAGE> 27
19
would take such action as may be prudent to seek to avoid becoming subject to
further regulation under the 1940 Act. There is no assurance, however, that
under such circumstances such regulation could be avoided.
THE EXCHANGE OFFER
PURPOSE OF THE EXCHANGE OFFER
On January 24, 1997, the Company issued $147,312,000 aggregate
principal amount at maturity of Old Notes to Credit Suisse First Boston
Corporation and UBS Securities LLC (the "Initial Purchasers"). The issuance was
not registered under the Securities Act in reliance upon the exemption under
Rule 144A and Section 4(2) of the Securities Act. In connection with the
issuance and sale of the Old Notes, the Company entered into a Registration
Rights Agreement with the Initial Purchasers dated as of January 20, 1997 (the
"Registration Rights Agreement"). The Registration Rights Agreement obligates
the Company to (i) file the Registration Statement of which this Prospectus is a
part for the Exchange Offer within 45 days after January 24, 1997, the date the
Old Notes were issued (the "Issue Date"), (ii) use its best efforts to cause the
Registration Statement to become effective within 150 days after the Issue Date
and (iii) consummate the Exchange Offer within 180 days of the Issue Date. A
copy of the Registration Rights Agreement has been filed as an exhibit to the
Registration Statement of which this Prospectus is a part. The Exchange Offer is
being made pursuant to the Registration Rights Agreement to satisfy the
Company's obligations thereunder.
Based on interpretations by the staff of the Commission, as set forth
in no-action letters issued to third parties, the Company believes that a holder
who exchanges Old Notes for New Notes pursuant to the Exchange Offer may offer
for resale, resell and otherwise transfer such New Notes without compliance with
the registration and prospectus delivery requirements of the Securities Act;
provided that (i) such New Notes are acquired in the ordinary course of such
Holder's business, (ii) such holder is not engaged in, and does not intend to
engage in, a distribution of such New Notes and has no arrangement with any
person to participate in the distribution of such New Notes, and (iii) such
holder is not an affiliate of the Company (as defined under Rule 405 of the
Securities Act). However, the staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." The Letter of Transmittal states that by so
acknowledging and by delivering a prospectus, a broker-dealer will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
This Prospectus, as it may be amended or supplemented from time to time, may be
used by a broker-dealer in connection with resales of New Notes (other than a
resale of an unsold allotment from the original sale of the Notes) received in
exchange for Old Notes where such Old Notes were acquired by such broker-dealer
as a result of market-making activities or other trading activities. The Company
has agreed that, for a period of 180 days after the Expiration Date, it will
make this Prospectus available to any broker-dealer for use in connection with
any such resale. See "Plan of Distribution."
TERMS OF THE EXCHANGE OFFER
Upon the terms and subject to the conditions set forth in this
Prospectus and in the accompanying Letter of Transmittal (which together
constitute the Exchange Offer), the Company will accept any and all Old Notes
validly tendered and not withdrawn prior to 5:00 p.m., New York City time, on
the Expiration Date. The Company will issue a principal amount at maturity of
New Notes in exchange for an equal principal amount at maturity of outstanding
Old Notes validly tendered pursuant to the Exchange Offer and not withdrawn
prior to the Expiration Date. Old Notes may only be tendered in integral
multiples at maturity of $1,000. Holders may tender some or all of their Old
Notes pursuant to the Exchange Offer.
The terms of the New Notes and the Old Notes are substantially
identical in all material respects, except that (i) the exchange will be
registered under the Securities Act and, therefore, the New Notes will not bear
legends
<PAGE> 28
20
restricting the transfer of such New Notes, and (ii) holders of the New
Notes will not be entitled to any of the registration rights of holders of Old
Notes under the Registration Rights Agreement, which rights will terminate upon
the consummation of the Exchange Offer. See "Description of New Notes." The New
Notes will evidence the same indebtedness as the Old Notes. The New Notes will
be issued under and entitled to the benefits of the Indenture pursuant to which
the Old Notes were issued such that the New Notes and Old Notes will be treated
as a single class of debt securities under the Indenture.
As of the date of this Prospectus, $147,312,000 aggregate principal
amount at maturity of the Old Notes are outstanding. This Prospectus, together
with the Letter of Transmittal, is being sent to all registered holders of the
Old Notes.
Holders of Old Notes do not have any appraisal or dissenters' rights
under the General Corporation Law of Delaware or the Indenture in connection
with the Exchange Offer. The Company intends to conduct the Exchange Offer in
accordance with the provisions of the Registration Rights Agreement and the
applicable requirements of the Exchange Act, and the rules and regulations of
the Commission thereunder. Old Notes which are not tendered and were not
prohibited from being tendered for exchange in the Exchange Offer will remain
outstanding and continue to accrue interest and to be subject to transfer
restrictions, but will not be entitled to any rights or benefits under the
Registration Rights Agreement.
Upon satisfaction or waiver of all the conditions to the Exchange
Offer, the Company will accept, promptly after the Expiration Date, all Old
Notes properly tendered and not withdrawn and will issue New Notes in exchange
therefor promptly after acceptance of the Old Notes. For purposes of the
Exchange Offer, the Company shall be deemed to have accepted properly tendered
Old Notes for exchange when, as and if, the Company has given oral or written
notice thereof to the Exchange Agent. The Exchange Agent will act as agent for
the tendering holders for the purposes of receiving the New Notes from the
Company.
In all cases, issuance of New Notes for Old Notes that are accepted for
exchange pursuant to the Exchange Offer will be made only after timely receipt
by the Exchange Agent of such Old Notes, a properly completed and duly executed
Letter of Transmittal and all other required documents; provided, however, that
the Company reserves the absolute right to waive any defects or irregularities
in the tender or conditions of the Exchange Offer. If any tendered Old Notes are
not accepted for any reason set froth in the terms and conditions of the
Exchange Offer or if Old Notes are submitted for a greater principal amount at
maturity than the holder desires to exchange, such unaccepted or nonexchanged
Old Notes or substitute Old Notes evidencing the unaccepted portion, as
appropriate, will be returned without expense to the tendering holder thereof as
promptly as practicable after the expiration or termination of the Exchange
Offer.
Holders who tender Old Notes in the Exchange Offer will not be required
to pay brokerage commissions or fees or, subject to the instructions in the
Letter of Transmittal, transfer taxes with respect to the exchange of Old Notes
pursuant to the Exchange Offer. The Company will pay all charges and expenses,
other than certain applicable taxes described below, in connection with the
Exchange Offer. See " -- Fees and Expenses."
EXPIRATION DATE; EXTENSION; AMENDMENTS
The term "Expiration Date," shall mean 5:00 p.m., New York City time,
on _________, 1997 (30 days following the commencement of the Exchange Offer),
unless the Company, in its sole discretion, extends the Exchange Offer, in which
case the term "Expiration Date" shall mean the latest date and time to which the
Exchange Offer is extended.
In order to extend the Exchange Offer, the Company will notify the
Exchange Agent of any extension by oral or written notice and will mail to the
registered holders an announcement thereof, prior to 9:00 a.m., New York City
time, on the next business day after the then Expiration Date.
The Company reserves the right, in its sole discretion, (i) to delay
accepting any Old Notes, to extend the Exchange Offer or to terminate the
Exchange Offer if any of the conditions set forth below under " -- Conditions"
<PAGE> 29
21
shall not have been satisfied, by giving oral or written notice of such delay,
extension or termination to the Exchange Agent or (ii) to amend the terms of the
Exchange Offer. Any such delay in acceptance, extension, termination or
amendment will be followed as promptly as practicable by oral or written notice
thereof to the registered holders. If the Exchange Offer is amended in a manner
determined by the Company to constitute a material change, the Company will
promptly disclose such amendment in a manner reasonably calculated to inform the
holders of Old Notes of such amendment.
Without limiting the manner in which the Company may choose to make a
public announcement of any delay, extension, amendment or termination of the
Exchange Offer, the Company shall have no obligation to publish, advertise, or
otherwise communicate any such public announcement, other than by making a
timely release to an appropriate news agency.
INTEREST ON THE NEW NOTES
Cash interest will not accrue on the New Notes prior to February 1,
2000. Thereafter, the New Notes will bear interest at the rate of 13-1/4% per
annum, payable semi-annually, in cash, on February 1 and August 1 of each year,
commencing August 1, 2000.
CONDITIONS
Notwithstanding any other term of the Exchange Offer, the Company will
not be required to exchange any New Notes for any Old Notes, and may terminate
or amend the Exchange Offer before the acceptance of any Old Notes for exchange,
if:
(a) any action or proceeding is instituted or threatened in any court
or by or before any governmental agency with respect to the Exchange Offer which
seeks to restrain or prohibit the Exchange Offer or, in the Company's judgment,
would materially impair the ability of the Company to proceed with the Exchange
Offer; or
(b) any law, statute, rule or regulation is proposed, adopted or
enacted, or any existing law, statute, rule, order or regulation is interpreted,
by any government or governmental authority which, in the Company's judgment,
would materially impair the ability of the Company to proceed with the Exchange
Offer; or
(c) the Exchange Offer or the consummation thereof would otherwise
violate or be prohibited by applicable law.
If the Company determines in its sole discretion that any of these
conditions are not satisfied, the Company may (i) refuse to accept any Old Notes
and return all tendered Old Notes to the tendering holders, (ii) extend the
Exchange Offer and retain all Old Notes tendered prior to the expiration of the
Exchange Offer, subject, however, to the rights of holders who tendered such Old
Notes to withdraw their tendered Old Notes, or (iii) waive such unsatisfied
conditions with respect to the Exchange Offer and accept all properly tendered
Old Notes which have not been withdrawn. If such waiver constitutes a material
change to the Exchange Offer, the Company will promptly disclose such waiver by
means of a prospectus supplement that will be distributed to the registered
holders, and the Company will extend the Exchange Offer for a period of five to
ten business days, depending upon the significance of the waiver and the manner
of disclosure to the registered holders, if the Exchange Offer would otherwise
expire during such five to ten business day period.
The foregoing conditions are for the sole benefit of the Company and
may be asserted by the Company regardless of the circumstances giving rise to
any such condition or may be waived by the Company in whole or in part at any
time and from time to time in its sole discretion. The failure by the Company at
any time to exercise any of the foregoing rights shall not be deemed a waiver of
any such right, and each such right shall be deemed an ongoing right which may
be asserted at any time and from time to time. Any determination by the Company
concerning the events described above shall be final and binding on all parties.
NO VOTE OF THE COMPANY'S SECURITYHOLDERS IS REQUIRED TO EFFECT THE EXCHANGE
OFFER AND NO SUCH VOTE (OR PROXY THEREFOR) IS BEING SOUGHT HEREBY.
<PAGE> 30
22
PROCEDURES FOR TENDERING
Only a holder of Old Notes may tender such Old Notes in the Exchange
Offer. To tender in the Exchange Offer, a holder must (i) complete, sign and
date the Letter of Transmittal, or a facsimile thereof, have the signatures
thereon guaranteed if required by the Letter of Transmittal, and mail or
otherwise deliver such Letter of Transmittal or such facsimile, together with
the Old Notes (unless such tender is being effected pursuant to the procedure
for book-entry transfer described below) and any other required documents, to
the Exchange Agent prior to 5:00 p.m., New York City time, on the Expiration
Date, or (ii) comply with the guaranteed delivery procedures described below.
Delivery of all documents must be made to the Exchange Agent at its address set
forth herein.
The tender of Old Notes by a holder as set forth below will constitute
an agreement between such holder and the Company in accordance with the terms
and subject to the conditions set forth in this Prospectus and in the Letter of
Transmittal.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
Any beneficial owner(s) whose Old Notes are registered in the name of a
broker, dealer, commercial bank, trust company or other nominee and who wishes
to tender should contact the registered holder promptly and instruct such
registered holder to tender on such beneficial owner's behalf. If such
beneficial owner wishes to tender on such owner's own behalf, such owner must,
prior to completing and executing the Letter of Transmittal and delivering such
owner's Old Notes, either make appropriate arrangement to register ownership of
the Old Notes in such owner's name or obtain a properly completed bond power
from the registered holder. The transfer of registered ownership may take
considerable time.
Signatures on a Letter of Transmittal or a notice of withdrawal
(described below), as the case may be, must be guaranteed by an Eligible
Institution (as defined) unless the Old Notes tendered pursuant thereto are
tendered (i) by a registered holder who has not completed the box entitled
"Special Payment Instructions" or "Special Delivery Instructions" on the Letter
of Transmittal or (ii) for the account of an Eligible Institution. In the event
that signatures on a Letter of Transmittal or a notice of withdrawal, as the
case may be, are required to be guaranteed, such guarantee must be made by a
member firm of a registered national securities exchange or of the National
Association of Securities Dealers, Inc., a commercial bank or trust company
having an office or correspondent in the United States or an "eligible guarantor
institution" within the meaning of Rule 17Ad-15 under the Exchange Act (an
"Eligible Institution").
If the Letter of Transmittal is signed by a person other than the
registered holder of any Old Notes listed therein, such Old Notes must be
endorsed or accompanied by a properly completed bond power, signed by such
registered holder as such registered holder's name appears on such Old Notes,
with the signature thereon guaranteed by an Eligible Institution. If the Letter
of Transmittal or any Old Notes or bond powers are signed by trustees,
executors, administrators, guardians, attorneys-in-fact, officers of
corporations or others acting in a fiduciary or representative capacity, such
persons should so indicate when signing, and unless waived by the Company,
evidence satisfactory to the Company of their authority to so act must be
submitted with the Letter of Transmittal.
All questions as to the validity, form, eligibility (including time of
receipt), acceptance of tendered Old Notes and withdrawal of tendered Old Notes
will be determined by the Company in its sole discretion, which determination
will be final and binding. The Company reserves the absolute right to reject any
and all Old Notes not properly tendered or any Old Notes the Company's
acceptance of which would, in the opinion of counsel for the Company, be
unlawful. The Company also reserves the right to waive any defects,
irregularities or conditions of
<PAGE> 31
23
tender as to particular Old Notes. The Company's interpretation of the terms and
conditions of the Exchange Offer (including the instructions in the Letter of
Transmittal) will be final and binding on all parties. Unless waived, any
defects or irregularities in connection with tenders of Old Notes must be cured
within such time as the Company shall determine. Although the Company intends to
notify holders of defects or irregularities with respect to tenders of Old
Notes, neither the Company, the Exchange Agent nor any other person shall incur
any liability for failure to give such notification. Tenders of Old Notes will
not be deemed to have been made until such defects or irregularities have been
cured or waived. Any Old Notes received by the Exchange Agent that are not
properly tendered and as to which the defects or irregularities have not been
cured or waived will be returned by the Exchange Agent to the tendering holders,
unless otherwise provided in the Letter of Transmittal, as soon as practicable
following the Expiration Date.
In addition, the Company reserves the right in its sole discretion to
purchase or make offers for any Old Notes that remain outstanding subsequent to
the Expiration Date or, as set forth below under "Conditions," to terminate the
Exchange Offer and, to the extent permitted by applicable law, purchase Old
Notes in the open market, in privately negotiated transactions or otherwise. The
terms of any such purchases or offers could differ from the terms of the
Exchange Offer.
By tendering, each holder will represent to the Company that, among
other things, (i) the New Notes to be acquired pursuant to the Exchange Offer
are being obtained in the ordinary course of business of such holder, (ii) such
holder has no arrangement or understanding with any person to participate in the
distribution (within the meaning of the Securities Act) of the New Notes and
(iii) it is not an "affiliate," as defined in Rule 405 under the Securities Act,
of the Company, or that if it is an "affiliate," it will comply with the
registration and prospectus delivery requirements of the Securities Act to the
extent applicable.
BOOK-ENTRY TRANSFER
The Exchange Agent will make a request to establish an account with
respect to the Old Notes at the book-entry transfer facility for the Old Notes,
The Depository Trust Company ("DTC"), for purposes of the Exchange Offer within
two business days after the date of this Prospectus. Any financial institution
that is a participant in DTC's systems may make book-entry delivery of Old Notes
by causing DTC to transfer such Old Notes into the Exchange Agent's account with
respect to the Old Notes in accordance with DTC's procedures for such transfer.
Although delivery of Old Notes may be effected through book-entry transfer into
the Exchange Agent's account at DTC, an appropriate Letter of Transmittal with
any required signature guarantee and all other required documents must in each
case be transmitted to and received and confirmed by the Exchange Agent at its
address set forth below on or prior to the Expiration Date, or, if the
guaranteed delivery procedures described below are complied with, within the
time period provided under such procedures.
GUARANTEED DELIVERY PROCEDURES
Holders who wish to tender their Old Notes and (i) whose Old Notes are
not immediately available, (ii) who cannot deliver their Old Notes, the Letter
of Transmittal or any other required documents to the Exchange Agent prior to
the Expiration Date, or (iii) who cannot complete the procedures for book-entry
transfer of Old Notes to the Exchange Agent's account with DTC prior to the
Expiration Date, may effect a tender if:
(a) The tender is made through an Eligible Institution;
(b) On or prior to the Expiration Date, the Exchange Agent receives
from such Eligible Institution a properly completed and duly executed notice of
guaranteed delivery substantially in the form provided by the Company (the
"Notice of Guaranteed Delivery") (by facsimile transmission, mail or hand
delivery) setting forth the name and address of the holder, the certificate
number(s) of such Old Notes (if possible) and the principal amount at maturity
of Old Notes tendered, stating that the tender is being made thereby and
guaranteeing that, within five business trading days after the Expiration Date,
(i) the Letter of Transmittal (or facsimile thereof) together with the
certificate(s) representing the Old Notes and any other documents required by
the Letter of Transmittal will be deposited by the Eligible Institution with the
Exchange Agent, or (ii) that book-entry transfer of such Old Notes into
<PAGE> 32
24
the Exchange Agent's account at DTC will be effected and confirmation of such
book-entry transfer will be delivered to the Exchange Agent; and
(c) Such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by the Letter
of Transmittal, or confirmation of book-entry transfer of the Old Notes into the
Exchange Agent's account at DTC, are received by the Exchange Agent within five
business trading days after the Expiration Date.
Upon request to the Exchange Agent, a Notice of Guaranteed Delivery
will be sent to holders who wish to tender their Old Notes according to the
guaranteed delivery procedures set forth above.
WITHDRAWAL OF TENDERS
Except as otherwise provided herein, tenders of Old Notes may be
withdrawn at any time prior to 5:00 p.m., New York City time, on the Expiration
Date.
To withdraw a tender of Old Notes in the Exchange Offer, a telegram,
telex, facsimile transmission or letter indicating notice of withdrawal must be
received by the Exchange Agent at its address set forth herein prior to 5:00
p.m., New York City time, on the Expiration Date. Any such notice of withdrawal
must (i) specify the name of the person having tendered the Old Notes to be
withdrawn (the "Depositor"), (ii) identify the Old Notes to be withdrawn
(including the certificate number or numbers and principal amount at maturity of
such Old Notes), (iii) be signed by the holder in the same manner as the
original signature on the Letter of Transmittal by which such Old Notes were
tendered (including any required signature guarantees) or be accomplished by
documents of transfer sufficient to have the Trustee with respect to the Old
Notes register the transfer of such Old Notes into the name of the person
withdrawing the tender and (iv) specify the name in which any such Old Notes are
to be registered, if different from that of the Depositor. If Old Notes have
been tendered pursuant to the procedure for book-entry transfer, any notice of
withdrawal must specify the name and number of the account at DTC to be credited
with the withdrawn Old Notes or otherwise comply with DTC's procedures. All
questions as to the validity, form and eligibility (including time of receipt)
of such notices will be determined by the Company, whose determination shall be
final and binding on all parties. Any Old Notes so withdrawn will be deemed not
to have been validly tendered for purposes of the Exchange Offer and no New
Notes will be issued with respect thereto unless the Old Notes so withdrawn are
validly retendered. Any Old Notes which have been tendered but which are not
accepted for payment will be returned to the holder thereof without cost to such
holder as soon as practicable after withdrawal, rejection of tender or
termination of the Exchange Offer. Properly withdrawn Old Notes may be
retendered by following one of the procedures described above under " --
Procedures for Tendering" at any time prior to the Expiration Date.
UNTENDERED OLD NOTES
Holders of Old Notes whose Old Notes are not tendered or are tendered
but not accepted in the Exchange Offer will continue to hold such Old Notes and
will be entitled to all the rights and preferences and subject to the
limitations applicable thereto under the Indenture. Following consummation of
the Exchange Offer, the holders of Old Notes will continue to be subject to the
existing restrictions upon transfer contained in the legend thereon. In general,
the Old Notes may not be offered for resale or resold, unless registered under
the Securities Act, except pursuant to an exemption from, or in a transaction
not subject to, the Securities Act and applicable state securities laws. The
Company will have no further obligations to such holders, other than the Initial
Purchasers, to provide for the registration under the Securities Act of the Old
Notes held by them after the Expiration Date. To the extent that Old Notes are
tendered and accepted in the Exchange Offer, the trading market for untendered
and tendered but unaccepted Old Notes could be adversely affected.
<PAGE> 33
25
EXCHANGE AGENT
United States Trust Company of New York has been appointed as Exchange
Agent of the Exchange Offer. Questions and requests for assistance, requests for
additional copies of this Prospectus or of the Letter of Transmittal and
requests for Notices of Guaranteed Delivery should be directed to the Exchange
Agent addressed as follows:
<TABLE>
<S> <C>
By Mail: By Overnight Courier:
United States Trust Company of New York United States Trust Company of New York
P.O. Box 844 770 Broadway - 13th Floor
Cooper Station Corporate Trust Operations
New York, NY 10276-0844 Department
(registered or certified mail recommended) New York, NY 10003
By Hand: By Facsimile:
United States Trust Company of New York (212) 420-6152
111 Broadway (For Eligible Institutions Only)
Lower level Confirm by telephone:
New York, NY 10006 (800) 548-6565
Attn: Corporate Trust Services
</TABLE>
DELIVERY TO AN ADDRESS OTHER THAN AS SET FORTH ABOVE OR TRANSMISSION OF
INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER THAN AS SET FORTH ABOVE WILL NOT
CONSTITUTE A VALID DELIVERY.
FEES AND EXPENSES
The expenses of soliciting tenders will be borne by the Company. The
principal solicitation is being made by mail; however, additional solicitation
may be made by telegraph, facsimile transmission, telephone or in person by
officers and regular employees of the Company and its affiliates.
The Company has not retained any dealer-manager in connection with the
Exchange Offer and will not make any payments to brokers, dealers or others
soliciting acceptances of the Exchange Offer. The Company, however, will pay the
Exchange Agent reasonable and customary fees for its services and will reimburse
it for its reasonable out-of-pocket expenses in connection therewith.
The cash expenses to be incurred in connection with the Exchange Offer
will be paid by the Company. Such expenses include registration fees and
expenses of the Exchange Agent and Trustee, accounting and legal fees and
printing costs, among others.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, certificates
representing New Notes or Old Notes for principal amounts not tendered or
accepted for exchange are to be delivered to, or are to be issued in the name
of, any person other than the registered holder of the Old Notes tendered, or if
tendered Old Notes are registered in the name of any person other than the
person signing the Letter of Transmittal, or if a transfer tax is imposed for
any reason other than the exchange of Old Notes pursuant to the Exchange Offer,
then the amount of any such transfer taxes (whether imposed on the registered
holder or any other person) will be payable by the tendering holder. If
satisfactory evidence of payment of such taxes or exemption therefrom is not
submitted with the Letter of Transmittal, the amount of such transfer taxes will
be billed directly to such tendering holder.
CONSEQUENCES OF FAILURE TO EXCHANGE
Upon consummation of the Exchange Offer, holders of Old Notes that were
not prohibited from participating in the Exchange Offer and did not tender their
Old Notes will not have any registration rights under the Registration Rights
Agreement with respect to such nontendered Old Notes and, accordingly, such Old
Notes will
<PAGE> 34
26
continue to be subject to the restrictions on transfer contained in the legend
thereon as a consequence of the issuance of the Old Notes pursuant to exemptions
from, or in transactions not subject to, the registration requirements of the
Securities Act and applicable state securities laws. In general, the Old Notes
may not be offered for resale or resold, unless registered under the Securities
Act, except pursuant to an exemption from, or in a transaction not subject to,
the Securities Act and applicable state securities laws. The Company does not
intend to register the Old Notes under the Securities Act. Based on
interpretations by the staff of the Commission, as set forth in no-action
letters issued to third parties, the Company believes that a holder who
exchanges Old Notes for New Notes pursuant to the Exchange Offer may offer for
resale, resell and otherwise transfer such New Notes without compliance with the
registration and prospectus delivery requirements of the Securities Act;
provided that (i) such New Notes are acquired in the ordinary course of such
Holder's business, (ii) such holder is not engaged in, and does not intend to
engage in, a distribution of such New Notes and has no arrangement with any
person to participate in the distribution of such New Notes, and (iii) such
holder is not an affiliate of the Company (as defined under Rule 405 of the
Securities Act). However, the staff of the Commission has not considered the
Exchange Offer in the context of a no-action letter and there can be no
assurance that the staff of the Commission would make a similar determination
with respect to the Exchange Offer as in such other circumstances. Each
broker-dealer that receives New Notes for its own account in exchange for Old
Notes, where such Old Notes were acquired by such broker-dealer as a result of
market-making activities or other trading activities, must acknowledge that it
will deliver a prospectus in connection with any resale of such New Notes. See
"Plan of Distribution." The New Notes may not be offered or sold unless they
have been registered or qualified for sale under applicable state securities
laws or an exemption from registration or qualification is available and is
complied with. The Company is required, under the Registration Rights Agreement,
to register the New Notes in any jurisdiction requested by the holders, subject
to certain limitations. To the extent that Old Notes are tendered and accepted
in the Exchange Offer, the trading market for untendered and tendered but
unaccepted Old Notes could be adversely affected.
OTHER
Participation in the Exchange Offer is voluntary and holders should
carefully consider whether to accept. Holders of the Old Notes are urged to
consult their financial and tax advisors in making their own decisions on what
action to take.
Upon consummation of the Exchange Offer, holders of the Old Notes that
were not prohibited from participating in the Exchange Offer and did not tender
their Old Notes will not have any registration rights under the Registration
Rights Agreement with respect to such nontendered Old Notes and such Old Notes
will continue to be subject to the restrictions on transfer contained in the
legend thereon. Accordingly, such Old Notes may not be offered, sold, pledged or
otherwise transferred except (i) to a person whom the seller reasonably believes
is a "qualified institutional buyer" within the meaning of Rule 144A under the
Securities Act purchasing for its own account or for the account of a qualified
institutional buyer in a transaction meeting the requirements of Rule 144A, (ii)
in an offshore transaction complying with Rule 904 of Regulation S under the
Securities Act, (iii) pursuant to an exemption from registration under the
Securities Act provided by Rule 144 thereunder (if available), (iv) pursuant to
an effective registration statement under the Securities Act or (v) to the
Company and, in each case, in accordance with all other applicable securities
laws.
ACCOUNTING TREATMENT
The New Notes will be recorded in the Company's accounting records at
the same carrying value as the Old Notes as reflected in the Company's
accounting records on the date of the exchange. Accordingly, no gain or loss for
accounting purposes will be recognized by the Company upon the consummation of
the Exchange Offer. The expenses of the Exchange Offer will be amortized over
the remaining term of the New Notes.
USE OF PROCEEDS
There will be no cash proceeds to the Company from the issuance of the
New Notes pursuant to the Exchange Offer.
<PAGE> 35
27
CAPITALIZATION
The following table sets forth the consolidated cash and consolidated
capitalization of the Company as of September 30, 1996, and as adjusted to give
effect to the Private Placement and the application of the net proceeds
therefrom. The table should be read in conjunction with the Company's
Consolidated Financial Statements included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
SEPTEMBER 30, 1996
------------------
AS
ACTUAL ADJUSTED
------ --------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
Cash and cash equivalents ....................... $ 9,651 $ 104,651
======== =========
Long-term debt
CDA Note ..................................... $ 4,987 $ 4,987
13-1/4% Senior Discount Notes Due 2004 ....... -- 94,900
-------- ---------
Total long-term debt ......................... 4,987 99,887
-------- ---------
Common stock purchase warrants(1) ............... -- 5,100
-------- ---------
Stockholders' equity:
Preferred stock, undesignated (par value
$1.00 per share; 2,000,000 shares
authorized; none outstanding) .............. -- --
Common stock (par value $0.01 per share;
25,000,000 shares authorized; 21,034,195
issued and outstanding)(2)(3) .............. 210 210
Additional paid-in capital ................... 50,644 50,644
Accumulated deficit .......................... (42,258) (42,258)
-------- ---------
Total stockholders' equity ................. 8,596 8,596
-------- ---------
Total capitalization ..................... $ 13,583 $ 113,583
======== =========
</TABLE>
- ---------------------------
(1) Reflects the $5.1 million ascribed to the Warrants issued in connection
with the Private Placement. No assurance can be given that the value
allocated to the Warrants is indicative of the price at which the Warrants
may actually trade.
(2) In January 1997, the stockholders of the Company authorized an amendment to
the Company's certificate of incorporation increasing the number of
authorized shares of Common Stock from 25,000,000 shares to 35,000,000
shares.
(3) On December 17, 1996, the Company had 21,047,106 shares of Common Stock
outstanding, which did not include (i) 2,538,258 shares of Common Stock
initially reserved for issuance upon exercise of the Warrants, (ii)
1,047,492 shares of Common Stock which may be issued upon exercise of
outstanding stock options granted to directors, officers and employees of
the Company, (iii) 699,724 shares of Common Stock subject to purchase upon
exercise of a warrant ("the CDA Warrant") to purchase shares of Common
Stock through August 1999 held by the CDA, (iv) 816,993 shares of Common
Stock (computed as of January 20, 1997) issuable upon conversion of the CDA
Note (as defined); and (v) 50,000 shares of Common Stock subject to
purchase through June 1998 upon the exercise of additional warrants issued
by the Company.
<PAGE> 36
28
SELECTED HISTORICAL CONSOLIDATED FINANCIAL AND CERTAIN OTHER DATA
The following tables reflect selected historical consolidated financial
and certain other data with respect to the Company for the periods indicated and
should be read in conjunction with the Company's Consolidated Financial
Statements included elsewhere in this Prospectus and "Management's Discussion
and Analysis of Financial Condition and Results of Operations".
The following selected historical consolidated statement of operations
and balance sheet data, insofar as it relates to each of the years 1991-1995,
has been derived from audited annual consolidated financial statements,
including the consolidated balance sheet at December 31, 1994 and 1995 and the
related consolidated statement of operations for the three years ended December
31, 1995 and the notes thereto included elsewhere in this Prospectus. The
selected historical consolidated statement of operations data for the nine
months ended September 30, 1995 and 1996 and the selected historical
consolidated balance sheet data as of September 30, 1996 have been derived from
unaudited condensed consolidated financial statements included elsewhere in this
Prospectus and which, in the opinion of management, include all adjustments,
consisting only of normal recurring adjustments, necessary for a fair statement
of the results for the unaudited interim periods. The unaudited interim period
results are not necessarily indicative of the results to be expected for the
full year.
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------- -----------------
1991 1992 1993(1) 1994 1995 1995 1996
---- ---- ------- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
CONSOLIDATED STATEMENT OF
OPERATIONS DATA
Revenues .......................... $ 102 $ 941 $ 1,122 $ 2,376 $ 2,973 $ 1,903 $ 4,270
Cost of goods sold ................ 878 2,373 1,718 3,822 4,113 2,763 4,673
-------- -------- -------- -------- -------- -------- --------
Gross profit (loss) ............ (776) (1,432) (596) (1,446) (1,140) (860) (403)
-------- -------- -------- -------- -------- -------- --------
Operating expenses:
Selling, general and
administrative ............... 3,207 4,628 5,966 6,039 6,952 5,044 5,080
Research and development ....... 1,627 2,503 2,325 2,571 2,491 2,094 786
Stock option compensation(2) ... -- -- 7,454 1,119 27 80 32
Patent license fee ............. -- 700 -- -- -- -- --
Depreciation and amortization .. 75 157 177 149 107 81 123
-------- -------- -------- -------- -------- -------- --------
Total operating expenses ..... 4,909 7,988 15,922 9,878 9,577 7,299 6,021
-------- -------- -------- -------- -------- -------- --------
Loss from operations ......... (5,685) (9,420) (16,518) (11,324) (10,717) (8,159) (6,424)
-------- -------- -------- -------- -------- -------- --------
Other income (expenses):
Interest income ................ -- 44 438 288 134 82 179
Interest expense ............... (510) (922) (340) (65) (291) (223) (283)
Gain (loss) on short-term
investments .................... -- -- -- (177) 6 5 --
Other .......................... (11) (66) -- -- -- -- --
-------- -------- -------- -------- -------- -------- --------
Total other income
(expenses)................. (521) (944) 98 46 (151) (136) (104)
-------- -------- -------- -------- -------- -------- --------
Loss before minority interest in
consolidated affiliate ....... (6,206) (10,364) (16,420) (11,278) (10,868) (8,295) (6,528)
Minority interest in loss of
consolidated affiliate ....... -- 831 423 -- -- -- --
Net loss(3) .................. $ (6,206) $ (9,533) $(15,997) $(11,278) $(10,868) $ (8,295) $ (6,528)
======== ======== ======== ======== ======== ======== ========
Earnings per share:
Weighted average number of
common shares outstanding(4)... 11,461 11,682 11,743 11,741 14,528
======== ======== ======== ======== ========
Net loss per common share(5) ...... $ (1.40) $ (0.97) $ (0.95) $ (0.72) $ (0.47)
======== ======== ======== ======== ========
</TABLE>
<PAGE> 37
29
<TABLE>
<CAPTION>
DECEMBER 31, SEPTEMBER 30,
---------------------------------------------------- -------------
1991 1992 1993(1) 1994 1995 1996
---- ---- ------- ---- ---- ----
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
CONSOLIDATED BALANCE SHEET DATA:
Net working capital (deficiency) .. $ (670) $ 2,800 $11,642 $3,452 $5,283 $12,091
Total assets ...................... 1,082 5,445 13,241 5,195 8,316 14,465
Long-term debt .................... 8,996 14,199 -- 1,981 3,335 4,987
Minority interest in consolidated
affiliate ......................... -- 8,531 -- -- -- --
Stockholders' equity (deficiency).. (9,230) (19,374) 12,405 2,268 3,215 8,596
</TABLE>
<TABLE>
<CAPTION>
NINE MONTHS
ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------------ ----------------------
1991 1992 1993(1) 1994 1995 1995 1996
---- ---- ------- ---- ---- ---- ----
(AMOUNTS IN THOUSANDS, EXCEPT INSTALLATION DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
OTHER DATA:
EBITDA(6) .............................. $(5,556) $ (8,371) $(15,290) $(10,839) $(10,114) $ (7,735) $ (5,706)
Cash flows from operating activities ... (5,267) (8,133) (11,855) (10,026) (11,160) (8,253) (6,327)
Cash flows from investing activities ... (449) (324) (8,641) 6,737 100 662 (758)
Cash flows from financing activities ... 5,633 12,866 18,606 1,901 13,139 11,935 13,526
Depreciation and amortization .......... 140 240 367 374 463 337 539
Capital expenditures ................... 449 324 574 303 452 287 245
Deficiency of earnings to fixed
charges(7) .......................... (6,206) (10,364) (16,420) (11,278) (10,868) (8,295) (6,528)
Pro forma deficiency of earnings to
fixed charges(8) .................... -- -- -- -- (26,000) -- (17,767)
Stores with ERS ShelfNet System
installed at end of period .......... -- 7 13 21 42 33 64
</TABLE>
- ---------------------------
(1) Reflects the consummation of the Combination immediately prior to the
closing of the Initial Public Offering.
(2) The non-cash compensation expense recognized for 1993 included compensation
earned for services prior to the Combination and compensation earned for
the period subsequent to the Combination through December 31, 1993.
Compensation expense recognized in 1994 and 1995 and the first nine months
of 1996 related to services provided by employees during those periods.
(3) Prior to the closing of the Initial Public Offering, the Company was
treated as an "S Corporation" for U.S. federal income tax purposes.
(4) In 1993, prior to the closing of the Initial Public Offering, the
calculation of weighted average number of common shares outstanding
included as common stock equivalents 725,104 shares subject to options
outstanding. Subsequent to such closing, the calculation does not reflect
common share equivalents that are anti-dilutive.
(5) Net loss per common share data for periods prior to December 31, 1993 has
not been presented as it is not meaningful due to the Combination
consummated immediately prior to the closing of the Initial Public
Offering.
(6) EBITDA is defined as earnings before interest expense, taxes, depreciation
and amortization. EBITDA is presented because the Company believes it is a
widely accepted financial indicator of an entity's ability to incur and
service debt. EBITDA should not be considered by an investor as an
alternative to net income or income from operations, as an indicator of the
operating performance of the Company or other consolidated operation or
cash flow data prepared in accordance with generally accepted accounting
principles, or as an alternative to cash flows as a measure of liquidity.
For the years ended December 31, 1993 and 1994, EBIDTA included non-cash
charges for stock option compensation expense of $7.5 million and $1.1
million, respectively; for the year
<PAGE> 38
30
ended December 31, 1995 and for the nine months ended September 30, 1995
and 1996, such amounts were not material.
(7) For purposes of determining the deficiency of earnings to fixed charges,
"earnings" consist of earnings before fixed charges and "fixed charges"
consist of interest on all debt and that portion of rental expense that the
Company believes to be representative of interest.
(8) The pro forma deficiency of earnings to fixed charges, as adjusted to give
effect to the Private Placement and the application of the net proceeds
therefrom.
<PAGE> 39
31
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
The market for ESL systems is in the development stage, and the Company
estimates that, as of September 30, 1996, approximately 115 stores in the United
States were operating such systems, out of a potential market in excess of
100,000 supermarkets and other stores. Large supermarket chains have tested the
productivity benefits as well as the technical functionality of ESL systems in
pilot stores, as a result of which the Company believes they are in a position
to consider rolling out the systems. The Company's objective is to be the
worldwide leader in the emerging ESL system market as product adoption and
penetration increases.
Because the market for ESL systems is in the development stage, market
acceptance of and demand for these systems are subject to a high level of
uncertainty. The Company's success will depend upon the rate at and extent to
which retailers choose to install ESL systems throughout their stores. The
initial acceptance and rate of installation by retailers may be affected by
numerous factors beyond the Company's control, including the customer's
assessment of the benefits of and the need for ESL systems and the customer's
available capital resources.
Since its inception in April 1990, the Company has been engaged
primarily in the development, design, market testing and, more recently, sale of
the ERS ShelfNet System. The Company subcontracts to third parties the
manufacture and assembly of the components comprising the ERS ShelfNet System.
In addition, the Company engages unaffiliated parties to augment its internal
development resources and to assist it in the continued development of the ERS
ShelfNet System. Since inception and through September 30, 1996, the Company has
generated cumulative revenues of $11.8 million, and has incurred a cumulative
net loss of approximately $62.9 million, which includes non-cash charges in the
amount of $8.6 million for stock option compensation expense.
The Company historically has marketed the ERS ShelfNet System for sale
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for capital-constrained retailers, which they have compared to
alternative uses of capital. The Company now intends also to market its ERS
ShelfNet System on a fee based, or "tolling", arrangement whereby the Company
will own the system and, with no upfront cash cost to the retailer, furnish the
system to retailers (generally for a period of up to five years), who will pay
monthly fees to the Company based largely on their actual usage of the system.
The Company believes the Tolling Plan will increase market acceptance of the ERS
ShelfNet System. However, there can be no assurance that the pricing strategy
will be accepted by customers or will be successful in helping the Company to
attain profitability.
Under the Tolling Plan, the Company will recognize revenues as monthly
usage and other fees are billed to customers. Also, under the Tolling Plan the
Company will retain ownership of the systems, which will be reflected as
long-term assets on the Company's consolidated balance sheet and which will be
depreciated on a straight-line basis over the shorter of their economic lives or
five years. Such assets will be subject to periodic impairment testing as
prescribed by Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of.
RESULTS OF OPERATIONS
NINE MONTHS ENDED SEPTEMBER 30, 1996 AND 1995
Revenues. The Company's revenues were $4,270,000 for the nine months
ended September 30, 1996, compared to $1,903,000 for the corresponding period in
1995. The increase in revenues was primarily attributable
<PAGE> 40
32
to greater product sales in 1996, including software license fees in the second
quarter. For the first nine months of 1996 and all of 1995, product sales were
to five customers within the supermarket industry.
Cost of goods sold. Cost of goods sold consists of the cost of hardware
components of the ERS ShelfNet System, system installation costs, depreciation
of tools and dies owned by the Company and utilized in the manufacturing of
hardware components, amortization of capitalized software costs, warranty and
maintenance costs, freight and inventory obsolescence.
Cost of goods sold was $4,673,000 for the nine months ended September
30, 1996, compared to $2,763,000 for the nine months ended September 30, 1995.
Cost of goods sold for the nine months ended September 30, 1996 included
warranty and maintenance expenses of $718,000, compared to $381,000 in the
corresponding 1995 period. The increase in warranty and maintenance costs
reflected the growing installation base for the ERS ShelfNet System. The Company
anticipates that system enhancements implemented in 1995 and 1996 will decrease
future warranty and maintenance expenses per installation and, in the future,
that the cost of goods sold will decrease as a percentage of revenues as a
result of higher manufacturing volumes of its components and as the installation
process is improved.
Selling, General and Administrative. Selling, general and
administrative costs consist of personnel costs associated with selling and
administrative staff, overhead, market research and development, and customer
service personnel. Selling, general and administrative costs were $5,080,000 in
the nine months ended September 30, 1996, compared to $5,044,000 in the
corresponding period in 1995.
Research and Development. Research and development expenses were
$786,000 for the nine months ended September 30, 1996, compared to $2,094,000
for the corresponding period in the previous year. Expenses incurred in the
development of the hardware components of the ERS ShelfNet System were $763,000
for the nine month period ended September 30, 1996, compared to $1,189,000 for
the same period in 1995, which reflected reduced payments to third parties for
development activities. During the nine month period ended September 30, 1996,
the Company capitalized $513,000 of product development costs that will be
amortized over the shorter of the estimated useful life of the related software
product or process or three years. During the nine month period ended September
30, 1995, the Company capitalized $78,000 of product development costs.
Stock Option Compensation. The Company recorded $32,000 in non-cash
compensation expense for the nine month period ended September 30, 1996,
compared to $80,000 for the corresponding period in 1995. Non-cash compensation
expense resulted from the Company's issuance of stock options to its employees
at exercise prices below the fair market value at date of grant and has been
recognized as an expense over the employees' respective service periods.
Interest Income. Interest income increased to $179,000 for the nine
month period ended September 30, 1996, compared to $82,000 for the same period
in 1995, due to increased cash and cash equivalents available for investment.
Interest Expense. Interest expense was $283,000 for the nine month
period ended September 30, 1996, compared to $223,000 for the corresponding
period in 1995. Interest expense in 1996 represents interest on amounts borrowed
from the CDA and, in 1995, on amounts borrowed from the CDA and pursuant to a
revolving credit facility between the Company and certain members of the Board
of Directors and their affiliates.
Income Taxes. Through September 30, 1996, the Company incurred net
losses since inception which generated net operating loss carryforwards for U.S.
federal income tax purposes of approximately $42 million, which NOLs are
generally available to offset future taxable income and expire at various times
from 2008 through 2011 for U.S. federal income tax purposes.
Section 382 of the Code, and regulations promulgated thereunder, impose
limitations on the ability of corporations to use NOLs, if the corporation
experiences a more than 50% change in ownership during any three-year period.
The amount of the NOL which may be utilized on an annual basis following such an
ownership change
<PAGE> 41
33
would be equal to the product of the value of the outstanding stock of the
Company immediately prior to the ownership change (reduced by certain
contributions to the Company's capital made in the two years prior to the
ownership change) multiplied by the "long-term tax-exempt rate" which is
determined monthly (5.64% for an ownership change occurring in December 1996).
Although the Company does not believe that it has experienced an
ownership change since the closing of the Initial Public Offering, it is
possible that such an ownership change may occur or be deemed to have occurred
as a result of events beyond the control of the Company, as a result of the
Private Placement or as a result of additional actions, such as transfers of
Common Stock by certain stockholders or the issuance of additional stock. In
addition, the NOLs are subject to examination by the IRS, and are thus subject
to adjustment or disallowance resulting from any such IRS examination. See "Risk
Factors -- Potential Loss of NOLs".
YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994
Revenues. The Company's revenues were $2,973,000 in 1995, compared to
$2,376,000 in 1994. The increase of $597,000 in 1995 was attributable to an
increase of $436,000 in product sales. The total increase in revenue also
reflected a $161,000 increase in maintenance revenue associated with a larger
installed customer base. All revenues were attributable to sales to customers in
the supermarket industry. Approximately 30% of revenues in 1995 was attributable
to a single customer, with three customers accounting for 83% of total revenues.
In 1994, a single customer was responsible for 67% of revenues and 81% of
revenues was attributable to two customers.
Cost of Goods Sold. Cost of goods sold was $4,113,000 in 1995, compared
to $3,822,000 in 1994, reflecting increased product sales in 1995. The Company
realized lower hardware component costs on installations during 1995 as compared
to 1994, reflecting an increase in the use of high volume, low cost suppliers.
In addition, included in cost of goods sold in 1994 is $300,000 of product
performance-related costs expected to be non-recurring. Such product
performance-related costs included a $125,000 provision for the upgrade of
certain prior customer installations with an enhanced version of a component of
the ERS ShelfNet System and the costs of a special quality and performance audit
of customer installations. Cost of goods sold in 1995 included warranty and
maintenance expenses of $561,000. The comparable costs in 1994 were $206,000,
excluding such special product performance-related costs. The increase in
warranty and maintenance costs reflected the growing installation base for the
ERS ShelfNet System.
Selling, General and Administrative. Selling, general and
administrative costs increased $913,000, to $6,952,000 in 1995 compared to
$6,039,000 in 1994. The increase in selling, general and administrative costs
was primarily attributable to efforts to expand the Company's organization in
anticipation of sales growth.
Research and Development. Research and development expenses were
$2,491,000 in 1995, compared to $2,571,000 in 1994. Expenses incurred in the
development of the hardware components of the ERS ShelfNet System were
$1,523,000 in 1995, compared to $989,000 in 1994, due to an increased use of
third parties to augment the Company's internal activities in the area of
long-term product development. Expenses incurred in the development of the
Company's software system were $968,000 in 1995, compared to $1,582,000 in 1994.
During the year ended December 31, 1995, the Company also capitalized $475,000
of product development costs that will be amortized over the shorter of the
economic life of the related software product or process or three years.
Stock Option Compensation. In connection with the Combination, the
Company issued to its employees, in replacement for outstanding performance
units, options for the purchase of 725,104 shares of its Common Stock at an
exercise price of $.01 per share. As a result, and taking into account
subsequent additional below-market option issuances and option terminations, the
Company recorded non-cash compensation expense of $27,000 in 1995 and $1,119,000
in 1994.
Interest Income. Interest income decreased to $134,000 in 1995,
compared to $288,000 in 1994, due to the decrease in the level of short-term
investments. Short-term investments were sold during 1995 and 1994 to fund the
Company's operating cash requirements.
<PAGE> 42
34
Interest Expense. Interest expense increased $226,000 to $291,000 in
1995, compared to interest expense of $65,000 in 1994. Interest expense
represented interest on amounts borrowed from the CDA and, through July 24,
1995, a revolving credit facility between the Company and members of the Board
of Directors and their affiliates.
Gain (Loss) on Short-Term Investments. The Company recognized $6,000 in
gains in 1995 and $177,000 in losses in 1994 on the market value of short-term
investments. There were no unrealized gains or losses on short-term investments
at December 31, 1995. At December 31, 1994, short-term investments of $1,027,000
were recorded net of a valuation allowance of $77,000 for unrealized losses. The
remaining $100,000 of such losses had been realized in 1994.
Income Taxes. In consideration of the Company's accumulated losses and
the uncertainty of its ability to utilize any future tax benefits resulting from
these losses, the impact of this potential tax benefit has been eliminated in
the Company's Consolidated Financial Statements as of December 31, 1995 and
1994. See Note 12 of the notes to consolidated financial statements included
herein and "Risk Factors -- Potential Loss of NOLs".
YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993
Revenues. The Company's revenues were $2,376,000 in 1994, compared to
$1,122,000 in 1993. The increase of $1,254,000 in 1994 was attributable to an
increase of $1,153,000 in product sales. The total increase in revenue also
reflected a $101,000 increase in maintenance revenue associated with a larger
installed customer base. All revenues were attributable to sales to customers in
the supermarket industry. Approximately 67% of revenues in 1994 and 58% of
revenues in 1993 were attributable to a single customer.
Cost of Goods Sold. Cost of goods sold was $3,822,000 in 1994, compared
to $1,718,000 in 1993, reflecting increased product sales in 1994. The Company
realized lower hardware component costs on installations during 1994 as compared
to 1993, reflecting an increase in the use of high volume low cost suppliers.
Additionally, included in cost of goods sold in 1994 was $300,000 of product
performance-related costs expected to be non-recurring. Cost of goods sold in
1994 included warranty and maintenance expenses of $206,000, excluding such
special product performance-related costs. The comparable costs in 1993 were
$111,000. The increase in warranty and maintenance costs reflected the growing
installation base for the ERS ShelfNet System.
Selling, General and Administrative. Selling, general and
administrative costs increased $73,000, to $6,039,000 in 1994, compared to
$5,966,000 in 1993. The Company's 1993 results included non-recurring costs of
approximately $176,000 for consulting services related to the Company's
continuing effort to seek further manufacturing and installation cost reduction
measures. The increase in selling, general and administrative costs of less than
5% in 1994 compared to the prior period (excluding such non-recurring costs)
primarily reflected efforts in 1993 to build an organization sufficient to
sustain a larger customer base and anticipated sales growth in 1994.
Research and Development. Research and development expenses were
$2,571,000 in 1994, compared to $2,325,000 in 1993. Expenses incurred in the
development of the hardware components of the ERS ShelfNet System were $989,000
in 1994, compared to $829,000 in 1993, due to an increased use of third parties
to augment the Company's internal activities in the area of long-term product
development. Expenses incurred in the development of the Company's software
system were $1,582,000 in 1994, compared to $1,496,000 in 1993, due to expansion
of the Company's internal software development activities and resources.
Stock Option Compensation. The Company recorded non-cash compensation
expense of $1,119,000 in 1994, compared to $7,454,000 in 1993. The decrease in
stock option compensation expense reflected increased expirations of the service
periods during which such compensation would have been earned.
Interest Income. Interest income decreased to $288,000 in 1994,
compared to $438,000 in 1993, due to the decrease in the level of short-term
investments. Short-term investments were sold during 1994 to fund the Company's
operating cash requirements.
<PAGE> 43
35
Interest Expense. Interest expense of $65,000 in 1994 represented
interest at the rate per annum of 7.4% on the principal amount borrowed from the
CDA in August 1994. Interest expense in 1993 consisted of interest on notes
payable to stockholders and interest accrued on compensation owed to the
Company's then President. The interest rate on the notes payable to such
stockholders averaged 8% in 1993. In connection with the Combination, such notes
payable to stockholders and accrued interest thereon were contributed to capital
and all accrued compensation and interest thereon was paid from a portion of the
proceeds of the Initial Public Offering.
Gain (Loss) on Short-Term Investments. During 1994, pursuant to the
Company's adoption of Statement of Financial Accounting Standards No. 115,
Accounting for Certain Investments in Debt and Equity Securities, the Company
recognized $177,000 in losses on the market value of short-term investments. At
December 31, 1994, short-term investments of $1,027,000 were recorded net of a
valuation allowance of $77,000 for unrealized losses. The remaining $100,000 of
such losses had been realized in 1994. The impact of the new accounting standard
on short-term investments held at December 31, 1993 was not material.
Minority Interest in Loss of Consolidated Affiliate. During July 1992,
the Company organized the Partnership, whose purpose was to further develop and
market the Company's ESL system. Prior to the Combination, the Company was the
controlling partner of the Partnership, and accordingly, the accounts of the
Partnership were consolidated with those of the Company. In 1993 the minority
interest in the loss of the Partnership was $423,000. Effective upon the
Combination, the Partnership interests were contributed to Common Stock and
additional paid-in capital.
Income Taxes. In consideration of the Company's accumulated losses and
the uncertainty of its ability to utilize any tax benefits from these losses,
the impact of the potential tax benefit of its net operating loss carryforwards
has been eliminated in the Company's Consolidated Financial Statements as of
December 31, 1994 and 1993. See "Risk Factors -- Potential Loss of NOLs".
NEW ACCOUNTING STANDARDS
In March 1995, the Financial Accounting Standards Board (the "FASB")
issued Statement of Financial Accounting Standards No. 121, Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of
("FAS 121"), which is effective for fiscal years beginning after December 15,
1995. FAS 121 requires that an impairment loss be recognized when circumstances
indicate that the carrying amount of an asset may not be recoverable. The
adoption of FAS 121 is not expected to have a material impact on the Company's
consolidated financial position or results of operations.
In October 1995, the FASB issued Statement of Financial Accounting
Standards No. 123, Accounting for Stock-Based Compensation ("FAS 123"),
effective for fiscal years beginning after December 15, 1995. FAS 123 indicates
a preference for a fair value based method of accounting for employee stock
options, but allows for continuation of the intrinsic value based method under
Accounting Principles Board Opinion No. 25, Accounting for Stock Issued to
Employees. The Company adopted FAS 123 effective January 1, 1996 and has chosen
to continue its use of the intrinsic value based method of accounting, but will
present all required FAS 123 disclosures in its Annual Report on Form 10-K for
the year ended December 31, 1996.
LIQUIDITY AND CAPITAL RESOURCES
As of September 30, 1996, the Company had net working capital of
$12,091,000, reflecting cash and cash equivalents of $9,651,000, compared to net
working capital of $5,283,000, reflecting cash and cash equivalents of
$3,210,000 at December 31, 1995. The increase in net working capital and in cash
and cash equivalents resulted primarily from the offshore public offering and
contemporaneous private placement of Common Stock in July 1996. Net cash used in
operations was $6,327,000 for the nine months ended September 30, 1996, compared
to net cash of $8,253,000 used in operating activities in the corresponding 1995
period. Although, during the first three quarters of 1996, the Company has had
successively larger quarterly revenues, the Company anticipates quarterly
revenues during the last quarter of 1996 in a substantially lesser amount than
the prior quarter, as a result, among other factors, of the transition to its
new marketing and product plans.
<PAGE> 44
36
On July 11, 1996, the Company completed: (i) the offshore public
offering (the "Regulation S Transaction") of an aggregate of 4,963,500 shares of
its Common Stock, in accordance with Regulation S under the Securities Act, as a
result of which the Company received gross proceeds of approximately $11.2
million, and (ii) the contemporaneous private placement (the "1996 Private
Placement") of an aggregate of 911,657 shares of Common Stock to subscribers,
including certain members of the Board of Directors and their affiliates, as a
result of which the Company received gross proceeds of approximately $2.1
million. The effective price per share of Common Stock in such transactions was
approximately $2.25.
In connection with completion of such transactions, holders of all
125,556 outstanding shares of the Company's Series A Cumulative, Convertible
Preferred Stock, $1.00 par value (the "Series A Preferred Stock"), converted
their shares, in accordance with their terms, into an aggregate of 3,138,900
shares of Common Stock, in exchange for payments aggregating $235,000 (the
"Preferred Stock Payments"). Following completion of such transactions,
including the issuance of 218,957 shares (the "Commission Shares") of Common
Stock as commissions in the Regulation S Transaction, the Company had
outstanding 21,033,062 shares of Common Stock.
The aggregate net proceeds to the Company in such transactions were in
the estimated amount of approximately $12 million (approximately $10.2 million
in the Regulation S Transaction and approximately $2.0 million in the 1996
Private Placement, in the aggregate net of the Preferred Stock Payments). Net
expenses do not reflect non-cash expenses represented by the Commission Shares
but reflect finder's fees in the amount of $199,000, which were applied to the
acquisition of shares in the Regulation S Transaction.
The Company borrowed the remaining $1,650,000 under its facility with
the CDA (all such indebtedness under such facility, the "CDA Indebtedness")
during the first quarter of 1996. The aggregate of $5,000,000 of CDA
Indebtedness is repayable five years after the August 1994 closing on such
facility and is convertible to shares of Common Stock, through August 12, 1997
at an adjusted conversion price calculated at $3.00 plus the average market
price of the Common Stock during the eighteen months prior to conversion and
thereafter at $3.00 plus the average market price of the Common Stock during the
twelve months prior to conversion. At closing, the CDA acquired five-year
warrants to purchase 699,724 shares (as adjusted through September 30, 1996) of
Common Stock, exercisable at an adjusted price through August 12, 1997
calculated as $2.58 plus the average market price of the Common Stock during the
eighteen months prior to exercise, and thereafter as $2.58 plus the average
market price of the Common Stock during the twelve months prior to exercise.
Under its arrangements with the CDA, the Company will be obligated to comply
with certain covenants (some of which remain in effect for up to ten years from
closing), whether or not the CDA Indebtedness has been repaid in full, or be
subject to certain penalties including immediate repayment of the CDA
Indebtedness in full. In the event of specified changes in control of the
Company coupled with prepayment of its note, the Company has rights to
repurchase such warrants and shares at the fair market value thereof (calculated
pursuant to such arrangements), and thereby, subject to the foregoing,
extinguish such covenants. In all events (and notwithstanding any such
repurchase), if the Company relocates outside of Connecticut before August 2004,
all advances made by the CDA are subject to acceleration, together with a
penalty of $250,000.
The Company's capital expenditures were $245,000 and $287,000 for the
nine months ended September 30, 1996 and 1995, respectively. The Company
anticipates that capital expenditures will approximate $400,000 in 1996. For the
nine months ended September 30, 1996 and 1995, the Company also capitalized
$513,000 and $78,000, respectively, of product development costs.
In addition to selling the ERS ShelfNet System to customers at a price
generally in excess of $100,000 per store, under the Company's proposed Tolling
Plan the Company will offer the system on a fee-based arrangement whereby the
Company retains ownership of the system. See "Business -- Marketing and Sales --
Tolling Agreements" below for a description of fixed and variable charges
proposed by the Company under the Tolling Plan. As a result, the Company will
have substantial manufacturing and carrying costs attendant to introduction of
the Tolling Plan, which will not initially be covered by revenues calculated on
the basis of usage fees paid by customers. Accordingly, the Company will require
substantial funds in order to support the introduction of the Tolling Plan.
<PAGE> 45
37
To date, the Company has not generated positive cash flow from
operations, and has historically funded its operations primarily through loans
from its stockholders, the sale of interests in an affiliated partnership, the
Initial Public Offering consummated in 1993, its arrangements with the CDA, the
sale of Series A Preferred Stock to members of the Board of Directors and their
affiliates, the Regulation S Transaction, the 1996 Private Placement and the
Private Placement. The Company will utilize the proceeds from the Private
Placement in connection with the anticipated expansion of its operations,
including for manufacturing and carrying costs attendant to the Tolling Plan,
and for general corporate purposes, including the funding of the Company's
ongoing engineering and development efforts. The Company believes that the
proceeds of the Private Placement, together with existing cash and cash
equivalents, will be sufficient to meet the Company's currently anticipated
operating and capital expenditure requirements for the foreseeable future.
The Company continues actively to explore, evaluate and have
discussions with respect to collaborative development projects and related
arrangements, and the Company may consider additional transactions, consistent
with the provisions of the Indenture, that will further enhance its liquidity.
The Company has not reached any determination with respect to the size or nature
of any such transaction or whether any such transaction will be undertaken, and
there can be no assurance that any such transaction will be effected.
<PAGE> 46
38
BUSINESS
GENERAL
The Company develops and provides ESL systems designed to allow
supermarket chains and other retailers to increase productivity, reduce labor
costs and improve management information systems. The Company is the leading
provider in the United States of ESL systems, based on management's estimates of
installed ESL systems. The ERS ShelfNet System has been designed to replace
paper price tags on retail shelves with electronic liquid crystal display units
and to provide a suite of applications to enhance a retailer's pricing,
inventory, shelf management, merchandising and promotional activities. The ERS
ShelfNet System is comprised of proprietary hardware and software that
electronically link a store's shelves to its POS systems and central computer.
The ERS ShelfNet System functions as a local area network, utilizing
open systems networking architecture driven by the Company's software and
communications hardware, which are designed to interface with other store and
vendor applications. Each ESL is a miniature data transceiver that is capable of
storing, receiving and returning alphanumeric messages. The ERS ShelfNet System
is designed to allow retailers to:
- Implement price changes almost instantaneously from the
store's central computer or directly from corporate or
regional headquarters;
- Ensure pricing integrity by accurately displaying and
monitoring product prices;
- Streamline stock monitoring activities to reduce lost sales
resulting from the failure to properly stock items;
- Increase the speed and accuracy of placing product displays
and promotional material by reducing and simplifying the tasks
required of store employees; and
- Audit inventory more efficiently and improve computerized
inventory ordering systems.
ERS believes these features enable retailers to reduce labor costs, increase
productivity and pricing accuracy, and improve inventory management, thereby
raising such retailers' gross margins and lowering their operating costs in the
highly competitive U.S. retailing market.
As of November 15, 1996, the ERS ShelfNet System was installed in 63
U.S. retail stores, including stores owned by such leading supermarket chains as
Vons, Stop & Shop Supermarket Company, HEB, Big Y Foods, Inc., Shaw's, Lucky,
The Great Atlantic & Pacific Tea Company, Inc. and K Mart Corporation, and one
supermarket owned by the Overwaitea Food Group in Canada. The Company's
customers include five of the 15 largest supermarket chains in the United
States. The Company estimates that, as of September 30, 1996, of the
approximately 29,800 supermarkets in the United States, approximately 115 stores
were operating ESL systems.
RECENT DEVELOPMENTS
In December 1996, ERS announced that (i) it will launch a new marketing
and pricing program designed to facilitate rapid market acceptance and
installation of the ERS ShelfNet System and (ii) it plans in the first quarter
of 1997 to introduce enhancements to the ERS ShelfNet System that provide spread
spectrum microwave transmission of data directly to battery operated, wireless
ESLs. The Company expects that implementation of these initiatives will reduce
the cost of installing and maintaining the ERS ShelfNet System. In addition, ERS
has signed the Letter of Intent with the Overwaitea Food Group providing for
installation of the ERS ShelfNet System in approximately 60 supermarkets
beginning in 1997. Such arrangements are subject to numerous conditions,
including the negotiation and execution of a definitive contract.
<PAGE> 47
39
NEW MARKETING AND PRICING PROGRAM
The Company historically has marketed the ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store. The purchase of an ESL
system from the Company has therefore represented a significant capital
expenditure for retailers. As a result, the Company believes that retailers have
compared potential investments in the ERS ShelfNet System to alternative uses of
capital, such as store acquisitions and improvements. The Company now intends
also to offer the ERS ShelfNet System on a fee based, or "tolling", arrangement
whereby the Company will own the system and, with no upfront cash cost to the
retailer, furnish the system to retailers (generally for a period of up to five
years), who will pay monthly fees to the Company based primarily on their actual
usage of the system. As a result, the Company believes that the Tolling Plan
will increase market acceptance of the ERS ShelfNet System.
Management estimates that, under the Tolling Plan, the annual cost
savings and benefits realized by its anticipated supermarket customers using the
ERS ShelfNet System could substantially exceed the anticipated annual cost to
the customer for the enhanced system proposed by ERS. For example, management
estimates, based on studies conducted in collaboration with the Company's
current customers, that a supermarket with 15,000 ESLs that changes 2,500 to
4,500 prices per week could, under the Company's proposed Tolling Plan, realize
annual net cost savings and benefits of approximately $40,000 to approximately
$240,000 per store through the anticipated level of usage of the full suite of
applications afforded by the ERS ShelfNet System. However, there can be no
assurance that any such benefits will be realized by any customer. See "Risk
Factors -- Use of Assumptions to Estimate Net Cost Savings and Benefits".
ENHANCEMENT OF THE ERS SHELFNET SYSTEM
The Company plans to introduce enhancements to the ERS ShelfNet System
that provide spread spectrum microwave transmission of data directly to wireless
ESLs. The enhanced ERS ShelfNet System is designed to provide additional
flexibility and convenience to customers by expanding potential coverage by the
Company's ESLs to the entire store and allowing the retailer to change store
placement of the ESLs more easily. The Company believes that the cost of
installing and maintaining its wireless ESLs will be lower than that of its
current ESL system, which requires the wiring of store aisles.
LETTERS OF INTENT
ERS has signed a non-binding Letter of Intent with the Overwaitea Food
Group providing for installation of the ERS ShelfNet System in approximately 60
supermarkets beginning in 1997. The Company also is pursuing other such
arrangements with other leading U.S. supermarket operators. The Letter of Intent
is, and all such additional arrangements, if any, will be, subject to numerous
conditions, including negotiation and execution of definitive contract terms.
See " -- Marketing and Sales" below for a description of the terms to be
proposed initially by the Company.
SECURITIES OFFERINGS
In July 1996, the Company raised approximately $12 million in net
proceeds pursuant to an offshore public offering of shares of Common Stock in
accordance with Regulation S under the Securities Act and the contemporaneous
private placement of Common Stock to subscribers, including members of the Board
of Directors and their affiliates. In January 1997, the Company raised
approximately $95 million in net proceeds as a result of the Private Placement.
BUSINESS STRATEGY
The Company's strategy is to achieve increasing recurring revenue
through greater market penetration of the ERS ShelfNet System. The Company
intends to focus its initial marketing efforts under the Tolling Plan on the
supermarket sector of the retail industry, to continue to reduce the
manufacturing costs of the system to increase the
<PAGE> 48
40
Company's profitability and to continue to enhance, develop and support
value-added applications of the ERS ShelfNet System.
- Tolling Plan. The Company believes that its Tolling Plan will
facilitate more rapid market acceptance of the ERS ShelfNet
System because it does not require an initial cash investment
by the customer. The Company intends to use a portion of the
proceeds from the Private Placement to install the ERS
ShelfNet System in the supermarkets covered by the Letter of
Intent and for other retailers under the Tolling Plan.
- Initial Focus on Supermarket Sector. The Company intends
initially to focus its marketing efforts on the supermarket
sector because of the Company's established relationships with
supermarket chains and the installed base of the ERS ShelfNet
System in supermarkets, as well as the Company's belief that
supermarket operators generally are more receptive than other
retailers to utilizing technology to reduce operating costs
and improve productivity. The Company estimates that, as of
September 30, 1996, of the approximately 29,800 supermarkets
in the United States, approximately 115 stores were operating
ESL systems.
- Reduce Manufacturing Costs. The Company intends to continue
its efforts to reduce the cost of manufacturing its wireless
ESLs through the application of established chip manufacturing
techniques to the ESL's integrated circuit, the integration of
various components in the ESL and the achievement of
significant economies of scale expected as a result of the
higher manufacturing volumes the Company believes will arise
from the implementation of the Tolling Plan.
- Value-Added Applications. In order to increase the appeal of
the Company's system to prospective customers (by increasing
the level of potential cost savings) and to encourage existing
customers to adopt the enhanced system (and install additional
systems), the Company intends to develop additional
applications for, and enhance existing applications of, the
ERS ShelfNet System.
RETAIL INDUSTRY OVERVIEW
The Company's target market consists of retailers that stock a large
number of stockkeeping units ("SKUs"), operate in highly competitive
environments, have relatively low margins and change prices frequently. Such
retailers include supermarkets, mass merchandisers, chain drug stores and
convenience stores. The Company believes that such retailers generally seek
automated solutions to reduce labor costs and improve efficiencies in
operations. The approximate number of supermarkets, discount mass merchandisers,
chain drug stores and convenience stores in the United States is set forth in
the table below. The table does not include the European market, where the
aggregate number of comparable stores is greater than in the United States.
<TABLE>
<CAPTION>
TYPE OF STORE NUMBER OF STORES
------------- ----------------
<S> <C>
Supermarkets..................... 29,800
Discount mass merchandisers...... 9,455
Chain drug stores................ 20,366
Convenience stores............... 56,000
-------
Total 115,621
=======
</TABLE>
Source: Progressive Grocer Annual Report, April 1996; MMR Annual Report,
April 29, 1996.
The Company believes that many of its target retailers are capital
constrained and have compared potential investments in the ERS ShelfNet System
to alternative capital expenditures. Such alternative uses of capital include
purchasing additional stores, remodeling and refurbishing existing stores,
making acquisitions and investing in technology, including ESL systems. The
Company's Tolling Plan is designed to eliminate a retailer's upfront cash cost
to install the ERS ShelfNet System, instead assessing tolling charges largely
for services the retailer actually uses. Thus, the ERS ShelfNet System will
constitute an operating expense (that the Company estimates to be more
<PAGE> 49
41
than offset by cost savings and benefits) rather than a capital expenditure for
retailers, allowing retailers to conserve capital for other projects while also
choosing to install the ERS ShelfNet System.
SUPERMARKET SECTOR
The supermarket sector is mature, intensely competitive and tends to
have margins that are among the lowest in the retailing industry. The Company
estimates that an average supermarket stocks approximately 19,500 SKUs, most of
which are available at competitive stores, and runs frequent promotions with
respect to many of these items. As a result, a supermarket's success depends in
large part on the efficiency of its operations, which in turn affects its
ability to offer competitive prices and maintain acceptable operating margins.
Supermarkets are under constant pressure to reduce costs, manage inventory more
effectively and offer competitive prices.
Historically, supermarkets have been among the first retailers to adopt
technologies designed to reduce labor and other costs, improve operations and
enhance customer service. For example, POS scanners were first introduced in the
supermarket sector and have achieved the greatest level of market penetration
there. While fewer than 15 supermarkets in the United States had POS scanners in
1974, by 1995 approximately 95% of all chain supermarket stores and
approximately 80% of independent supermarket stores had installed POS scanners.
POS systems have enabled retailers to reduce labor costs, improve pricing
integrity and increase efficiency while also providing additional applications
such as electronic funds transfer and computerized inventory management. The
Company believes that supermarkets and other retailers will more quickly adopt
other technological innovations as a result of their experience with POS
scanners. As a result, and because of the Company's established relationships
with supermarket chains and its installed base of ERS ShelfNet Systems in
supermarkets, the Company intends to continue to focus its marketing efforts in
the supermarket sector.
CHALLENGES FACING RETAILERS THAT AFFECT THE COMPANY
The Company has designed the ERS ShelfNet System to address
competitive, productivity, cost and merchandising issues for retailers as
summarized below:
MANUAL PRICE CHANGES
Although POS systems have enabled supermarkets to achieve efficiencies
at the "front end" of the store, the center of the typical store has not been
automated and remains labor intensive. The Company estimates that an average
supermarket carries approximately 19,500 SKUs and changes approximately 2,500
prices per week at the shelf with newly printed paper labels. These price
changes require numerous manual steps resulting in (i) significant labor costs
and (ii) delays in implementing price changes following special promotions or to
reflect increases in wholesale costs, which adversely affect supermarket
profitability.
PRICING INTEGRITY
In addition to being labor intensive and time-consuming, manual
implementation of price changes also is more susceptible to pricing inaccuracy,
which has come under increased scrutiny by customers and governmental entities.
Stores with inaccurate prices risk customer dissatisfaction as well as fines and
penalties levied by governmental agencies. According to Supermarket News,
February 5, 1996, over 90% of supermarket executives surveyed rate the issue of
pricing verification as extremely or highly important. As a result, supermarket
operators incur significant expense in auditing pricing integrity and correcting
pricing inaccuracies.
MERCHANDISING MANAGEMENT
Supermarkets actively promote products at the shelf with a variety of
merchandising materials such as "hangers" or "bibs", which are affixed to the
shelf or a product's price label and alert consumers to pricing or promotional
activities. Supermarkets install and remove bibs manually, with employees
generally walking the aisle and checking promotional items against a printed
list arranged according to the shelfset schematics (called
<PAGE> 50
42
"planograms"). The Company believes using such a printed list is an
unnecessarily time-consuming, inaccurate and costly process.
REPLENISHMENT/INVENTORY MANAGEMENT
Supermarkets lose sales (and their corresponding margins) when products
are inadvertently missing from the prescribed shelfset, often due to lost or
damaged paper labels. In addition, damaged and handwritten paper labels result
in increased order entry errors, which increases both out-of-stocks (resulting
in lost sales) and labor costs associated with the product ordering process.
SHELFSET MANAGEMENT
Typically, supermarkets carefully develop planograms for the management
of products and product categories in the stores, on the belief that products
perform best in the aggregate when arranged on shelves as prescribed by the
planogram. When paper labels are lost, damaged or moved, deviations from the
planogram occur, resulting in a higher incidence of out-of-stock items, loss of
sales of potentially high margin items, continued stocking of discontinued or
unauthorized products, and increased time and labor associated with new cut-ins
to a shelfset that differ from the planogram.
ERS SHELFNET APPLICATIONS
The ERS ShelfNet System has been designed (i) to replace paper price
tags on retail shelves with electronic liquid crystal display units, and (ii) to
provide a suite of applications to address the challenges to retailers of manual
price changes, pricing integrity, merchandising management,
replenishment/inventory management and shelfset management. The ERS ShelfNet
System's applications are designed to include Instant Response Pricing,
Integrated Electronic Pricing, QuickP.O.P.(TM), AccuStock(TM) and ShelfSet
Audit.
<TABLE>
<CAPTION>
RETAIL CHALLENGE ERS SOLUTION
<S> <C>
Manual Price Changes.................. Instant Response Pricing. The ERS ShelfNet System allows retailers to
implement price changes almost instantaneously from the store's central
computer or directly from corporate or regional headquarters, which the
Company believes facilitates significant labor savings from manual
implementation of price changes. In addition, electronic price changes
are significantly faster to implement, which the Company believes leads
to increased margins as prices may be increased promptly following
special promotions or increases in wholesale prices.
Pricing Integrity..................... Integrated Electronic Pricing. The ERS ShelfNet System electronically
links a store's POS systems and its ESLs, virtually eliminating
discrepancies between prices displayed on the store shelves and prices
charged at checkout. This assurance of pricing integrity permits
retailers to reduce or eliminate manual pricing audits and fines paid to
governmental entities for pricing inaccuracies. In addition, such
pricing accuracy can result in fewer price checks and errors at
checkout, can result in faster checkout times, improved cashier
productivity and increased customer satisfaction.
Merchandising Management.............. QuickP.O.P. The ERS ShelfNet System's QuickP.O.P. application is
designed to increase the speed and accuracy of placing product displays
and promotional material by causing the ESL to flash, indicating
products that require the addition or removal of bibs or hangers. This
is intended to eliminate the time-consuming and potentially inaccurate
process of checking promotional items against a printed list arranged
according to the planogram.
Replenishment/Inventory Management.... AccuStock. The ERS ShelfNet System's AccuStock application is designed
to allow authorized store personnel to change ESLs from a price display
to an out-
</TABLE>
<PAGE> 51
43
<TABLE>
<CAPTION>
RETAIL CHALLENGE ERS SOLUTION
<S> <C>
of-stock message and to replace the current system of noting
out-of-stocks manually, with the use of a label scanner, which requires
follow-up by the store employee. AccuStock facilitates simple notation
of out-of-stocks during normal stocking procedures, with the system
automatically generating an out-of-stock report that can be resolved
quickly by store management. In addition, the display of an out-of-stock
message, rather than removal of a paper label, holds the shelf placement
for the missing product, increasing planogram integrity.
Shelfset Management................... ShelfSet Audit. The ERS ShelfNet System is designed to maintain
shelfsets more easily, because the ESLs stay locked in place and cannot
be moved back and forth as can paper tags. In addition, the ESL is
designed to display product facing information and section, shelf, and
bay locations for simple, more accurate and less paper-intensive
planogram implementations or changes. These features are intended to
reduce labor associated with shelfset management and stocking and
increase planogram compliance and monitoring.
</TABLE>
Management estimates that, under the Tolling Plan, its anticipated supermarket
customers using the ERS ShelfNet System (including the full suite of its
applications at the anticipated level of usage) could realize annual net cost
savings and benefits ranging from approximately $40,000 to approximately
$240,000 per store. See " -- Recent Developments -- New Marketing and Pricing
Program" above.
THE ERS SHELFNET SYSTEM
The Company's ESL system replaces paper price tags on retail shelves
with liquid crystal display labels and transmits pricing and other information
to and from the shelf edge. The Company's current system utilizes a
communications hub to transmit data to controllers on each aisle wired to the
ESLs. The Company plans to introduce enhancements to its system which permit the
transmission of data directly to wireless ESLs.
Each ERS ShelfNet System generally consists of 10,000 to 20,000 ESLs
and the necessary communication and support infrastructure to link the ESLs with
the store's central computer and POS systems. The Company's enhanced system
consists of the following components:
ELECTRONIC SHELF LABEL
Each ESL is a mini data transceiver contained in a plastic case, which
displays price and other information by means of a wide-angle view liquid
crystal display window. The ESL is also able to display pricing and other
promotional information for the consumer and inventory and reorder information
for store employees, and is equipped with two buttons designed to allow store
staff to interact with the store computers from the ESL on the shelf. The
Company offers four different sizes and types of ESLs for use in different
applications, such as SKUs for coolers and freezers. The Company's currently
installed ESLs are powered through the rails to which they are connected,
whereas the wireless ESLs which the Company plans to introduce in the first
quarter of 1997 are powered by long-life batteries.
SPREAD SPECTRUM WIRELESS NETWORK
Communication to the ESLs is managed by a high frequency, real-time
communication system that uses spread spectrum technology. Active cell antennas
in the store ceiling send and receive signals to and from wireless ESLs in their
respective coverage areas. The cells form a radio frequency infrastructure in
which multiple, non-overlapping cells may be active simultaneously, while
overlapping cells synchronize their transmissions, permitting spectrum re-use.
The redundancy of transmission provided by ERS' spread spectrum network helps to
eliminate interference problems and to ensure that complete information is
clearly communicated.
<PAGE> 52
44
COMMUNICATION HUB
The local area network's communication hub, located in the store's back
office area, has two functions: (i) the hub distributes signals to the ESLs
through computerized information processors which relay information to active
cell antennae in the store ceiling and from the antennae to the individual
product ESLs located on the shelf and (ii) the hub receives information from the
information processors which has been relayed by the antennae in the ceiling
after receipt from the ESLs located on the shelf.
SYSTEM CONTROLLER
The system controller is a personal computer or the existing in-store
processor, also located in the store's back office area, which is linked
directly to the store's electronic POS system. The system software resides in
the system controller, and allows the same pricing data that is incorporated
into the POS system to be used with the ERS ShelfNet System simultaneously. The
system controller communicates the pricing or other data directly to and from
the communication hub. The system controller is designed to receive information
from the store's corporate or regional headquarters (such as product price or
promotional information) and to communicate data to such headquarters (such as
product order information).
SOFTWARE SYSTEM
The Company's ESL system is designed to be compatible with electronic
POS scanning systems and is compatible with systems provided by the three major,
worldwide suppliers of POS systems, IBM, NCR, and Fujitsu-ICL. The Company's
system may also be interfaced with major store operating systems, such as OS/2,
Windows NT and Unix. Because the "intelligence" of the ERS ShelfNet System is
located in the system controller and not the individual ESLs, the Company is
able to incorporate new functions into its system by upgrading software without
replacing any hardware.
The Company's system can be linked to an in-store laser printer capable
of printing paper overlays for ESLs, paper labels for non-electronic shelves and
other promotional items. The Company furnishes its customers with specific
procedures and guidelines for each application which show store managers how to
utilize the ERS system and software tools, and a data collection and analysis
format to document productivity increases and to monitor ongoing improvements in
store operations.
MARKETING AND SALES
GENERAL
The Company historically has marketed its ERS ShelfNet System for sale,
at prices generally in excess of $100,000 per store, a significant capital
expenditure for retailers. The Company now intends also to market the ERS
ShelfNet System under its Tolling Plan, whereby the Company will own the system
and, with no upfront cash cost to the retailer, furnish the system to retailers
who will pay monthly fees to the Company based largely on their actual usage of
the system.
The Company will continue to focus its marketing efforts on major
national and regional supermarket chains. The Company believes that each
supermarket chain will typically choose a single supplier of ESL systems to
maximize chainwide efficiency. Therefore, the Company's marketing strategy is to
make installations in a small number of stores in each of the largest
supermarket chains in North America and then to build upon such installations by
installing systems through the rest of the chain's stores. In response to
retailing trends, the Company has also increased its marketing efforts to mass
merchandisers.
Based upon its experience to date, the Company expects that the
adoption process for the ERS ShelfNet System will occur in four successive
phases, as follows:
<PAGE> 53
45
- Detailed review of store procedures and systems and
documentation of expected cost savings and benefits;
- Agreement for multi-store adoption of the ERS ShelfNet System
subject to design, installation and implementation of a single
store evaluation system and concurrent design of integration
plans, operating procedures and training programs for broader
use by the retailer;
- Installation of the first group of stores within a chain,
defined by a geographic or merchandising region, to establish
final chain-wide operating procedures; and
- Chain-wide commercial rollout.
TOLLING AGREEMENTS
The Company has signed a non-binding Letter of Intent providing for
installation of the ERS ShelfNet System in approximately 60 supermarkets
beginning in 1997. The Letter of Intent is subject to numerous conditions,
including negotiation and execution of a definitive contract.
Under the terms proposed by the Company, the Company will own the ERS
ShelfNet System and furnish the system to qualified customers, identified by the
Company as those retailers who meet minimum requirements with respect to price
change potential per store and number of ESLs ordered. The Company's contract
with such customers will provide for: (i) a fixed rate charge per ESL per month
and (ii) a base rate charge per ESL price change, calculated on the basis of
average weekly changes over the prior three months, less volume discounts.
Charges will be billed to the customer on a monthly basis. In addition to such
amounts, the Company will collect transaction fees for usage of each value added
application, subject to monthly maximum applications surcharges and also to
initial periods during which no such surcharge, or a discounted surcharge, will
be billed. The Company intends to use such initial discounts to encourage
retailers to use such applications.
The Company's proposals will allow the customer to terminate the
program and return the Company's system at any time after the first twelve
months. The customer's fees will cease upon termination, except for agreed upon
amounts in certain circumstances.
ORGANIZATION
The Company currently markets its products directly to major retail
chains through a marketing and sales force which, with sales support staff,
consists of thirteen employees. The Company's marketing and sales personnel have
significant retail experience, including experience in the POS system and local
area network industries. The Company's marketing staff works with existing and
potential customers to define their needs for ESL systems and to coordinate
their implementation of the ERS ShelfNet System. The Company exhibits its system
at major trade shows worldwide and produces and distributes promotional
materials to increase market awareness of the Company's system. In addition, the
Company will continue to investigate the feasibility of marketing its system
through indirect channels such as value added resellers and distributors.
COLLABORATIVE DEVELOPMENT
The Company has collaborated with supermarket retailers and suppliers
of in-store wireless networks, printing services, merchandise planning systems
and other retail systems providers in order to develop a better understanding of
customer needs and to offer comprehensive customer solutions. The Company will
continue to pursue such efforts and will seek strategic partners to assist the
Company in the broad market adoption and roll-out of the Company's enhanced
system.
<PAGE> 54
46
CUSTOMERS
As of November 15, 1996, the ERS ShelfNet System was installed in 63
U.S. retail stores, including those owned by such leading supermarket chains as
Vons, The Stop & Shop Supermarket Company, HEB, Big Y Foods, Inc., Shaw's,
Lucky, The Great Atlantic & Pacific Tea Company, Inc., and K Mart Corporation,
and one supermarket owned by the Overwaitea Food Group in Canada. The Company's
customers include five of the 15 largest supermarket chains in the United
States.
In June 1996, the Company obtained a sub-contract from NCR under NCR's
prime contract to upgrade POS systems at U.S. military commissaries, subject to
receipt of purchase orders by the Company from NCR. Pursuant to such
arrangements, NCR has delivered an order for a software license covering the
installation of the ERS ShelfNet System.
During the year ended December 31, 1993, Vons and Lucky accounted for
58% and 24%, respectively, of the Company's consolidated revenues; during the
year ended December 31, 1994, HEB and Vons accounted for 14% and 67%,
respectively, of the Company's consolidated revenues; and during the year ended
December 31, 1995, HEB, Vons and Shaw's accounted for 30%, 27% and 26%,
respectively, of the Company's consolidated revenues.
INSTALLATION AND CUSTOMER SERVICE
The ERS ShelfNet System is designed to be installed in a store without
disrupting normal store operations. In connection with the introduction of its
enhanced system, the Company intends to use a team comprised of one Company
employee and two sub-contracted installers to install communications
infrastructure and software and, if rail strips are also ordered by the
customer, up to an additional five sub-contracted installers to install such
hardware. The ESLs generally will be programmed at the Company's facilities and
shipped to the site where they will be installed by the customer.
The Company's customer service group is staffed with employees
experienced in POS and other retail systems. The Company's Tolling Plan will
commit the Company to a standard maintenance contract, at no additional charge,
with extended maintenance services available at additional charges to the
customer.
MANUFACTURING
The Company utilizes third parties to manufacture and assemble the
components comprising the ERS ShelfNet System. The Company's ESLs currently
incorporate a microprocessor which is supplied solely by Sanyo. However, the
Company believes that other suppliers could produce equivalent microprocessors
within approximately four months. The Company's policy is to maintain an
inventory of microprocessors sufficient to meet substantially all of its
requirements during any such period. The Company intends to evaluate, from time
to time, establishing relationships with other manufacturers of microprocessors
to provide a second source of supply for its ESLs.
The Company intends to maintain its practice of utilizing manufacturing
subcontractors, and has a supply arrangement with Surface Mount Technology Ltd.,
of Hong Kong, for the assembly of ESLs. The Company also continues to utilize
Modulus, Inc. as a domestic source for the assembly of its ESLs. The Company has
not experienced interruptions or delays in the manufacture or assembly of its
systems, and believes that alternative sources of system components are readily
available.
ENGINEERING AND DEVELOPMENT
The Company's principal engineering and development efforts have been
conducted through software and hardware development groups located at its
facilities in Connecticut and Massachusetts. These groups focus on improvements
to current technology and also on new applications of existing technology. The
Company's engineering staff also generates the functional specifications and
development schedules for each of the Company's
<PAGE> 55
47
customers. The Company has also from time to time engaged third parties to
design hardware components based upon requirements or specifications developed
by the Company, and entered into arrangements with hardware and software
developers to augment the Company's internal activities in the area of long-term
product development. The Company's arrangements with such developers are
typically subject to termination by the Company without penalty, and
continuation of such arrangements will in each case depend upon the satisfactory
achievement by such developers of specified milestones or other satisfactory
performance by them.
During the years ended December 31, 1993, 1994 and 1995, the Company
incurred expenses for research and development activities of, respectively,
$2,325,000, $2,571,000 and $2,491,000. During the year ended December 31, 1995,
the Company capitalized an aggregate of $475,000 in costs of internal labor and
outside services associated with product development. During the nine months
ended September 30, 1995 and 1996, the Company incurred expenses for research
and development of $2,094,000 and $786,000, respectively, and capitalized an
aggregate of $78,000 and $513,000, respectively, of product development costs.
INTELLECTUAL PROPERTY
The Company has aggressively pursued an intellectual property rights
strategy to protect its product developments. The Company's policy is to file
patent applications to protect its technology, inventions and improvements that
are important to the development of its business, and to seek copyright
protection with respect to its software. The Company also relies upon trade
secrets, know-how, continuing technological innovation and licensing
opportunities to develop and maintain its competitive position.
The Company holds eleven United States patents and has six additional
United States patent applications pending, one pending provisional patent
application and eleven foreign patent applications pending. The Company also has
other applications under preparation and intends to continue to file patent
applications on its novel products and systems. Certain of these patents and
patent applications are directed to salient features of the Company's ESL
system, in particular relating to the ESL and associated hardware, and the
communications network linking the components of the system.
The Company's wholly-owned subsidiary, Amacrine International, Inc.
("Amacrine"), is entitled to use, and to grant sublicenses with respect to,
certain Telepanel patents directed to an alphanumeric display module and radio
frequency communications system, which Amacrine designed and developed for
Telepanel under a technical services agreement which existed between such
companies. The Company has become aware of certain statements made by Telepanel,
which the Company believes are without merit, regarding whether Telepanel is
entitled to a sublicense fee in respect of such patents.
The Company attempts to protect certain computer software and service
applications through the use of copyright and trade secret law. The Company
relies on non-disclosure agreements with its employees, customers, consultants,
and strategic partners.
In 1993 in connection with the settlement of certain litigation, the
Company was granted a limited non-exclusive license in the United States,
Canada, the United Kingdom, Australia, Japan and Germany covering certain United
States and foreign patents, of which Telepanel is the exclusive licensee, in
consideration of a $700,000 payment made by the Company to Telepanel. During
1994, the United States patent underlying Telepanel's patent rights applicable
to such license expired.
See "Risk Factors -- Protection of Intellectual Property" for a
description of certain risks involving the Company's intellectual property.
COMPETITION
The Company believes that the only ESL system suppliers offering a
product currently competing with the Company's system in the United States are
Telepanel, Pricer and, recently, NCR. Telepanel has publicly reported the
existence of an arrangement with IBM whereby IBM may market the Telepanel
system. See " -- Intellectual
<PAGE> 56
48
Property" above for a description of the settlement in January 1993 of certain
patent litigation between the Company and Telepanel. The Company believes NCR
also has developed and is testing an ESL system in the United States. Outside of
the United States, in addition to Pricer, the Company expects to compete with a
number of companies with ESL systems under development.
As more fully described under "Risk Factors -- Competition and
Technological Change" above, the emerging ESL system market is characterized by
rapid technological advances and evolving industry standards, and the Company
may be subject to a high degree of potential competition with additional
companies which may attempt to develop or market competing ESL systems. In the
future, the Company may face competition from vendors of POS systems, or scanner
manufacturers which offer products related to POS systems, who may elect to
enter the market for ESL systems. The ERS ShelfNet System is also subject to
competition from vendors selling traditional paper labeling methods, as well as
providers of hand-held portable data terminals.
The principal competitive factors in the Company's business are product
functionality, price/performance and reliability. The Company believes that it
competes favorably on each of these factors.
EMPLOYEES
As of November 1, 1996, the Company had 59 full-time employees,
consisting of 24 engaged in engineering and development and manufacturing
support, ten in marketing and sales activities, 18 in customer services and
seven in general administrative and executive functions. At such date, the
Company had an additional 29 part-time employees, engaged primarily in customer
service functions. The Company does not have a collective bargaining agreement
with any of its employees and considers its relationship with its employees to
be excellent.
FACILITIES
The Company's executive offices are located at 372 Danbury Road,
Wilton, Connecticut, where the Company leases approximately 14,700 square feet
of space (exclusive of space subleased to an affiliate). The Company's lease
expires in July 1997 and requires payment of annual rent (net of sublease
payments) in the amount of approximately $241,000 (in addition to increases in
operating expenses and real estate taxes). Of the Company's space in Wilton,
approximately 1,900 square feet is devoted to office and administrative uses,
approximately 6,600 square feet to engineering and development activities, and
approximately 6,200 square feet to marketing, sales and customer service
functions.
The Company leases an additional space of approximately 5,000 square
feet for engineering and development activities in Westford, Massachusetts, and
at other smaller locations where required to support its operations. The
foregoing facilities are regarded by management as adequate in all material
respects for the current requirements of the Company's business.
As described under Note 7 of the Notes to the Company's Consolidated
Financial Statements included elsewhere in this Prospectus, the CDA Note is
secured by the assets of the Company and the Principal Subsidiary.
LEGAL PROCEEDINGS
In 1992, in proceedings commenced by the Company in the High Court of
Justice, Chancery Division, England against defendants John Baxter and
Epsi'lanne (UK) Limited, the defendants served counterclaims seeking, among
other things, to enjoin the Company from selling its system in the United
Kingdom. The Company does not believe that these counterclaims have any merit.
GOVERNMENT REGULATION
Accuracy in pricing on the part of supermarkets has been an objective
of state and local regulation. At least 18 states currently have laws or
regulations requiring some form of "unit pricing" (which require prices and
price per measure to be displayed at the shelf), and at least nine states (and
other local jurisdictions) have laws requiring
<PAGE> 57
49
"item pricing" (which require the marking of prices on individual consumer
packages for some or all products in the retail store). The existence of item
pricing laws applicable to any of the Company's intended customers increases
such customers' costs of providing price information to consumers and may
decrease or eliminate some of the potential benefits of implementation of the
ERS ShelfNet System. In some of the states that have item pricing laws, such
pricing is not required if the price is clearly presented on the shelf and
consumers are offered the means by which to mark individual items. In the State
of Connecticut, the item pricing law allows the State's Department of Consumer
Protection to exempt from item pricing requirements stores employing an approved
ESL system.
The United States Federal Communications Commission has established
standards for radio frequency emissions from computer products, and certain
components utilized in the Company's ESL system must comply with such criteria.
All components currently incorporated into the ERS ShelfNet System comply with
such standards, and the Company does not anticipate any material delays in
securing any required certification for components under development by the
Company. Certain foreign countries also regulate radio frequency emissions.
<PAGE> 58
50
MANAGEMENT
The executive officers and directors of the Company, and their
respective ages and positions with the Company, are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ---- --- --------
<S> <C> <C>
Norton Garfinkle(1)(2)(3)(4)... 65 Chairman of the Board and Director
Bruce F. Failing, Jr.(1)(3).... 48 Vice Chairman of the Board and Chief
Executive Officer and Director
George B. Weathersby(1)........ 52 Chairman of the Executive Committee
of the Board, President and Director
Michael R. Valiton............. 35 Senior Vice President, Technology
and Operations
William B. Ames................ 52 Vice President, Manufacturing
William B. Fischer............. 45 Vice President, Finance
James M. Nolan, Jr............. 41 Vice President, New Product
Development
Paul M. Patrick................ 44 Vice President
Paul A. Biddelman(1)(2)(4)..... 50 Director
David Diamond.................. 38 Director
Donald E. Zilkha(1)(2)(4)...... 45 Director
</TABLE>
- ---------------------------
(1) Member of Executive Committee.
(2) Member of Compensation Committee.
(3) Member of Director Stock Option Committee.
(4) Member of Audit Committee.
Each director holds office until the next annual meeting of
stockholders and until his successor is elected and qualified. Each executive
officer serves at the discretion of the Board of Directors.
Mr. Garfinkle, a founder of the Company and its Chairman of the Board,
has been a director of the Company since its inception in April 1990. Since
1970, Mr. Garfinkle has also been the Chairman of Cambridge Management
Corporation, which manufactures and markets the DAP series of massively parallel
processing computers, and has also served during this period as Chairman of its
affiliates, including Oxford Management Corporation, which specialize in the
research and development of new technologies. From 1985 to 1988, Mr. Garfinkle
was Chairman of Oral Research Laboratories, Inc., a manufacturer of dental
hygiene products founded by Mr. Garfinkle. Mr. Garfinkle also served as a
director of Actmedia, Inc. from 1975 to 1978 and from 1983 to 1988. In December
1995, pursuant to an agreement with New York State authorities, Mr. Garfinkle
admitted to a misdemeanor relating to his 1989 New York State tax return and
paid all taxes required by the agreement.
Mr. Failing, a founder of the Company and its Vice Chairman of the
Board and Chief Executive Officer, has been a director of the Company since its
inception and served as President through February 1997. In 1973, Mr. Failing
co-founded Actmedia, Inc., a provider of in-store advertising for the
supermarket industry, and was President and Chief Executive Officer of Actmedia,
Inc. until its sale in 1989.
Mr. Weathersby, the Chairman of the Executive Committee of the Board of
Directors, has been President of the Company since February 1997 and a director
of the Company since April 1996. Mr. Weathersby has been Vice Chairman of
Cambridge Management Corporation and its affiliates including Oxford Management
<PAGE> 59
51
Corporation, since 1993. From 1991 to 1993, Mr. Weathersby was a general partner
of Founder's Court, an investment management firm. Mr. Weathersby is a director
of Holnam, Inc. and USA Group, Inc.
Mr. Valiton has been Senior Vice President, Technology and Operations
of the Company since March 1996, having joined the Company in July 1994 and
become Vice President, Delivery in January 1995. From prior to 1991 until
joining the Company, Mr. Valiton held various positions with Ungermann-Bass,
Inc., the last of which was as Director of Customer Administration.
Mr. Ames has been Vice President, Manufacturing of the Company since
April 1995. From prior to 1991 until joining the Company, Mr. Ames was employed
in various positions by the Hewlett-Packard Company, the last of which were as
Strategic Planning Manager and Manufacturing Development Engineering Manager.
Mr. Fischer has been Vice President, Finance of the Company since April
1995, having served as Controller of the Company from May 1994 until April 1995.
From September 1990 until joining the Company, Mr. Fischer was Director of
Financial Accounting Policies at GTE Corporation. From 1978 until 1990, Mr.
Fischer was employed by Price Waterhouse LLP, having last held the position of
Senior Manager.
Mr. Nolan has been Vice President, New Product Development of the
Company since November 1993. From 1981 until 1993, Mr. Nolan held various
positions with Sequoia Systems, Inc., a developer of fault tolerant computer
systems, the last of which was as Vice President of Engineering.
Mr. Patrick has been a Vice President of the Company since 1992. From
1989 to 1992, Mr. Patrick was Vice President, Canadian Operations, of Stores
Automated Systems, Inc., a manufacturer of retail point-of-sale products and
services.
Mr. Biddelman has been a director of the Company since 1993. Since
1992, Mr. Biddelman has been the Treasurer of Hanseatic Corporation, a private
investment company, and from 1991 to 1992 was a Managing Director of Clements
Taee Biddelman Incorporated, a financial advisor. Mr. Biddelman is a director of
Insituform Technologies, Inc., Celadon Group, Inc., Premier Parks, Inc.,
Petroleum Heat & Power Co., Inc., Star Gas Corporation (general partner of Star
Gas Partners, L.P.), and Oppenheimer Group, Inc.
Mr. Diamond has been a director of the Company since April 1996. Since
January 1997, Mr. Diamond has been Executive Vice President of Marketing and New
Applications of Catalina Marketing Corp. and Mr. Diamond has been a consultant
to suppliers of products and services to the supermarket industry since 1994.
From 1992 to 1994, Mr. Diamond was President of Lamaze Publishing Company, Inc.,
a publisher of material on neonatal care. From prior to 1991 until 1992, Mr.
Diamond was Senior Vice President of Strategic Planning and New Development of
Actmedia, Inc.
Mr. Zilkha has been a director of the Company since 1993. Since prior
to 1991, Mr. Zilkha has been President of Zilkha & Company, a private investment
advisor.
No family relationship exists between any of the directors or executive
officers of the Company.
DESCRIPTION OF THE NOTES
GENERAL
The Old Notes were and the New Notes will be issued under an Indenture,
dated as of January 24, 1997 (the "Indenture") between the Company and United
States Trust Company of New York, as trustee (the "Trustee"), a copy of which
has been filed as an exhibit to the Registration Statement of which this
Prospectus is a part. The statements under this caption relating to the Notes
and the Indenture are summaries and do not purport to be complete, and are
subject to, and are qualified in their entirety by reference to, all the
provisions of the Indenture, including the definitions of certain terms therein
and those terms made a part thereof by the Trust Indenture Act of
<PAGE> 60
52
1939, as amended. Where reference is made to particular provisions of the
Indenture or to defined terms not otherwise defined herein, such provisions or
defined terms are incorporated herein by reference as part of the statement made
and such statements are qualified in their entirety by such reference.
TERMS OF THE NOTES
The Notes are unsecured senior obligations of the Company, limited to
$147,312,000 aggregate principal amount at maturity, and will mature on February
1, 2004. Except as described below under " -- Exchange Offer; Registration
Rights", no cash interest will accrue on the Notes prior to February 1, 2000,
although for U.S. Federal income tax purposes a significant amount of original
issue discount, taxable as ordinary income, will be recognized by a Holder as
such discount accrues from the issue date of the Notes through February 1, 2004.
Cash interest will accrue on the Notes at the rate per annum shown on the cover
page hereof from February 1, 2000, or from the most recent date to which
interest has been paid or provided for, payable semi-annually to Holders of
record at the close of business on the January 15 or July 15 immediately
preceding the interest payment date on February 1 and August 1 of each year,
commencing August 1, 2000. The Company will pay interest on overdue principal at
1% per annum in excess of such rate, and it will pay interest on overdue
installments of cash interest at such higher rate to the extent lawful.
The Notes are issued only in fully registered form, without coupons, in
denominations of $1,000 and any integral multiple of $1,000. No service charge
shall be made for any registration of transfer or exchange of Notes, but the
Company may require payment of a sum sufficient to cover any transfer tax or
other similar governmental charge payable in connection therewith.
OPTIONAL REDEMPTION
The Notes are not redeemable at the option of the Company prior to
February 1, 2001. Thereafter, the Notes will be redeemable, at the Company's
option, in whole or in part, at any time and from time to time, upon not less
than 30 nor more than 60 days' prior notice mailed by first-class mail to each
Holder's registered address, at the following redemption prices (expressed in
percentages of principal amount at maturity), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the relevant interest payment date), if
redeemed during the 12-month period commencing on February 1 of the years set
forth below:
<TABLE>
<CAPTION>
REDEMPTION
PERIOD PRICE
------ -----
<S> <C>
2001.............. 106.625%
2002.............. 103.313
2003 and thereafter 100.000
</TABLE>
In the case of any partial redemption, selection of the Notes for
redemption will be made by the Trustee on a pro rata basis, by lot or by such
other method as the Trustee in its sole discretion shall deem to be fair and
appropriate, although no Note of $1,000 in principal amount at maturity or less
shall be redeemed in part. If any Note is to be redeemed in part only, the
notice of redemption relating to such Note shall state the portion of the
principal amount at maturity thereof to be redeemed. A new Note in principal
amount at maturity equal to the unredeemed portion thereof will be issued in the
name of the Holder thereof upon cancellation of the original Note.
RANKING
The Notes are senior unsecured obligations of the Company, rank pari
passu in right of payment with all existing and future senior unsecured
indebtedness of the Company and are senior in right of payment to all future
subordinated indebtedness of the Company. However, the CDA Note is secured by
the assets of the Company and the Principal Subsidiary. As of January 31, 1997,
the Company's senior indebtedness outstanding was approximately $99.9 million,
consisting of the Notes and the CDA Note.
<PAGE> 61
53
Substantially all of the operations of the Company are conducted
through its subsidiaries. Claims of creditors of such subsidiaries, including
the CDA, trade creditors, secured creditors and creditors holding indebtedness
and guarantees issued by such subsidiaries, and claims of preferred stockholders
(if any) of such subsidiaries generally will have priority with respect to the
assets and earnings of such subsidiaries over the claims of creditors of the
Company, including holders of the Notes. However, in connection with the
incurrence of future indebtedness by certain of the Company's Subsidiaries, the
Notes may be guaranteed by such Subsidiaries (the "Subsidiary Guarantors"). See
" -- Certain Covenants -- Future Guarantors". The Notes, therefore, will be
effectively subordinated to creditors (including trade creditors) and preferred
stockholders (if any) of Subsidiaries of the Company other than any future
Subsidiary Guarantors. At September 30, 1996, the total liabilities of the
Company's subsidiaries (exclusive of indebtedness owed to the Company in the
amount of $37 million) were approximately $5.9 million, including the CDA Note,
trade payables and accrued expenses. See "Risk Factors -- Ranking of Notes;
Holding Company Structure". Although the Indenture limits the incurrence of
Indebtedness and issuance of Preferred Stock of certain of the Company's
Subsidiaries, such limitation is subject to a number of significant
qualifications. Moreover, the Indenture does not impose any limitation on the
incurrence by such Subsidiaries of liabilities that are not considered
Indebtedness or Preferred Stock under the Indenture. See " -- Certain Covenants
- -- Limitation on Indebtedness and Preferred Stock of Subsidiaries".
EXCHANGE OFFER; REGISTRATION RIGHTS
The Company has filed this Registration Statement and will commence the
Exchange Offer pursuant to the Registration Rights Agreement. In the event that
the Initial Purchasers so request with respect to Notes not eligible to be
exchanged for New Notes in the Exchange Offer, or if any holder of Notes is not
eligible to participate in the Exchange Offer or does not receive freely
tradable New Notes in the Exchange Offer, the Company agreed to, at its cost,
(a) as promptly as practicable, file a shelf registration statement (the "Shelf
Registration Statement") covering resales of the Notes, (b) use its reasonable
best efforts to cause the Shelf Registration Statement to be declared effective
under the Securities Act and (c) keep the Shelf Registration Statement effective
until the earlier of (i) the time when the Notes covered by the Shelf
Registration Statement can be sold pursuant to Rule 144 without any limitations
under clauses (c), (e), (f) and (h) of Rule 144 and (ii) three years from the
Issue Date. The Company agreed to, in the event a Shelf Registration Statement
is filed, among other things, provide to each holder for whom such Shelf
Registration Statement was filed copies of the prospectus which is a part of the
Shelf Registration Statement, notify each such holder when the Shelf
Registration Statement has become effective and take certain other actions as
are required to permit unrestricted resales of the Notes. A holder selling Notes
pursuant to the Shelf Registration Statement generally would be required to be
named as a selling security holder in the related prospectus and to deliver a
prospectus to purchasers, will be subject to certain of the civil liability
provisions under the Securities Act in connection with such sales and will be
bound by the provisions of the Registration Rights Agreement which are
applicable to such holder (including certain indemnification obligations).
If (i) on or prior to 180 days after the original issuance of the
Notes, neither the Exchange Offer is consummated nor the Shelf Registration
Statement is declared effective; or (ii) after either the Registration Statement
or the Shelf Registration Statement is declared effective, such Registration
Statement thereafter ceases to be effective or usable (subject to certain
exceptions) in connection with resales of Old Notes or New Notes in accordance
with and during the periods specified in the Registration Rights Agreement (each
such event referred to in clauses (i) and (ii), a "Registration Default"),
additional cash interest will accrue on the Old Notes and the New Notes as
applicable, in each case at the rate of 0.50% per annum from and including the
date on which any such Registration Default shall occur until the earlier of (i)
the date on which such Registration Default has been cured or (ii) the date on
which all the Notes otherwise become freely transferable by holders other than
affiliates of the Company without further registration under the Securities Act,
calculated on the Accreted Value of the Old Notes or New Notes, as the case may
be, as of the Specified Date on which such interest is payable. Such interest is
payable in addition to any other interest payable from time to time with respect
to the Old Notes and the New Notes.
The summary herein of certain provisions of the Registration Rights
Agreement does not purport to be complete and is subject to, and is qualified in
its entirety by reference to, all the provisions of the Registration Rights
Agreement, a copy of which is available upon request to the Company.
<PAGE> 62
54
BOOK-ENTRY, DELIVERY AND FORM
Each of the Old Notes was issued in the form of one or more fully
registered Notes in global form ("Old Global Notes"), except that each of the
Notes offered and sold to institutional "accredited investors" (as defined in
Rule 501(a)(1), (2), (3) or 7 under the Securities Act) was delivered in
certificated fully registered form only and bear a legend containing
restrictions on transfers. All New Notes issued in the Exchange Offer for Old
Notes represented by Old Global Notes will be represented by one or more Notes
in global form (the "New Global Notes," and together with the Old Global Notes,
the "Global Notes"), which will be deposited with, or on behalf of, the
Depositary and registered in the name of the Depositary or its nominee.
Upon issuance of the Global Notes, the Depositary or its nominee will
credit, on its book-entry registration and transfer system, the number of New
Notes represented by such Global Notes to the accounts of institutions that have
accounts with the Depositary or its nominee ("participants"). Ownership of
beneficial interests in the Global Notes will be limited to participants or
persons that may hold interests through participants. Ownership of beneficial
interest in such Global Notes will be shown on, and the transfer of that
ownership will be effected only through, records maintained by the Depositary or
its nominee (with respect to participants' interests) for such Global Notes, or
by participants or persons that hold interests through participants (with
respect to beneficial interests of persons other than participants). The laws of
some jurisdictions may require that certain purchasers of securities take
physical delivery of such securities in definitive form. Such limits and laws
may impair the ability to transfer or pledge beneficial interests in the Global
Notes.
So long as the Depositary, or its nominee, is the registered holder of
any Global Notes, the Depositary or such nominee, as the case may be, will be
considered the sole legal owner and holder of such Notes represented by such
Global Notes for all purposes under the Indenture and the New Notes. Except as
set forth below, owners of beneficial interests in Global Notes will not be
entitled to have such Global Notes represented thereby registered in their
names, will not receive or be entitled to receive physical delivery or
Certificated Securities in exchange therefor and will not be considered to be
the owners or holders of such Global Notes represented thereby for any purpose
under the New Notes or the Indenture. The Company understands that under
existing industry practice, in the event an owner of a beneficial interest in a
Global Note desires to take any action that the Depositary, as the holder of
such Global Note, is entitled to take, the Depositary would authorize the
participants to take such action, and that the participants would authorize
beneficial owners owning through such participants to take such action or would
otherwise act upon the instructions of beneficial owners owning through them.
Any payment of principal or interest due on the New Notes on any
interest payment date or at maturity will be made available by the Company to
the Trustee by such date. As soon as possible thereafter, the Trustee will make
such payments to the Depositary or its nominee, as the case may be, as the
registered owner of the Global Notes representing such New Notes in accordance
with existing arrangements between the Trustee and the Depositary.
The Company expects that the Depositary or its nominee, upon receipt of
any payment of principal or interest in respect of the Global Notes, will credit
immediately the accounts of the related participants with payments in amounts
proportionate to their respective beneficial interests in the principal amount
of such Global Note as shown on the records of the Depositary. The Company also
expects that payments by participants to owners of beneficial interests in the
Global Notes held through such participants will be governed by standing
instructions and customary practices, as is now the case with securities held
for the accounts of customers in bearer form or registered in "street name", and
will be the responsibility of such participants.
None of the Company, the Trustee, or any payment agent for the Global
Notes will have any responsibility or liability for any aspect of the records
relating to or payments made on account of beneficial ownership interests in any
of the Global Notes or for maintaining, supervising or reviewing any records
relating to such beneficial ownership interests or for other aspects of the
relationship between the Depositary and its participants or the relationship
between such participants and the owners of beneficial interests in the Global
Notes owning through such participants.
<PAGE> 63
55
As long as the New Notes are represented by a Global Note, DTC's
nominee will be the holder of the New Notes and therefore will be the only
entity that can exercise a right to repayment or repurchase of the New Notes.
See "Description of the Notes -- Change of Control" and " -- Certain Covenants
- -- Limitation on Sales of Assets and Subsidiary Stock". Notice by participants
or by owners of beneficial interests in a Global Note held through such
participants of the exercise of the option to elect repayment of beneficial
interests in Notes represented by a Global Note must be transmitted to DTC in
accordance with its procedures on a form required by DTC and provided to
participants. In order to ensure that DTC's nominee will timely exercise a right
to repayment with respect to a particular New Note, the beneficial owner of such
Note must instruct the broker or other participant to exercise a right to
repayment. Different firms have cut-off times for accepting instructions from
their customers and, accordingly, each beneficial owner should consult the
broker or other participant through which it holds an interest in a New Note in
order to ascertain the cut-off time by which such an instruction must be given
in order for timely notice to be delivered to DTC. The Company will not be
liable for any delay in delivery of notices of the exercise of the option to
elect repayment.
Unless and until exchanged in whole or in part for New Notes in
definitive form in accordance with the terms of the New Notes, the Global Notes
may not be transferred except as a whole by the Depositary to a nominee of the
Depositary or by a nominee of the Depositary to the Depositary or another
nominee of the Depositary or by the Depositary of any such nominee to a
successor of the Depositary or a nominee of each successor.
Although the Depositary has agreed to the foregoing procedures in order
to facilitate transfers of interests in the Global Notes among participants of
the Depositary, it is under no obligation to perform or continue to perform such
procedures, and such procedures may be discontinued at any time. Neither the
Trustee nor the Company will have any responsibility for the performance by the
Depositary or its participants or indirect participants of their respective
obligations under the rules and procedures governing their operations. The
Company and the Trustee may conclusively rely on, and shall be protected in
relying on, instructions from the Depositary for all purposes.
Upon transfer of Certificated Notes to a QIB, such Certificated Notes
will be transferred to the corresponding Global Notes. Global Notes shall be
exchangeable for corresponding Certificated Notes registered in the name of
persons other than the Depositary or its nominee only if (A) the Depositary (i)
notifies the Company that it is unwilling or unable to continue as Depositary
for any of the Global Notes or (ii) at any time ceases to be a clearing agency
registered under the Exchange Act, (B) there shall have occurred and be
continuing an Event of Default (as defined in the Indenture) with respect to the
Notes or (C) the Company executes and delivers to the Trustee an order that the
Global Notes shall be so exchangeable. Any Certificated Notes will be issued
only in fully registered form and shall be issued without coupons in
denominations of $1,000 and integral multiples thereof. Any Certificated Notes
so issued will be registered in such names and in such denominations as the
Depositary shall request.
The Depositary has advised the Company as follows: The Depositary is a
limited-purpose trust company organized under the New York Banking Law, a
"banking organization" within the meaning of the New York Banking Law, a member
of the Federal Reserve System, a "clearing corporation" within the meaning of
the New York Uniform Commercial Code and a "clearing agency" registered pursuant
to the provisions of Section 17A of the Exchange Act. The Depositary was created
to hold securities of institutions that have accounts with the Depositary
("participants") and to facilitate the clearance and settlement of securities
transactions among its participants in such securities through electronic
book-entry changes in accounts of participants, thereby eliminating the need for
physical movement of securities certificates. The Depositary's participants
include securities brokers and dealers (which may include the Initial
Purchasers), banks, trust companies, clearing corporations and certain other
organizations. Access to the Depositary's book-entry system is also available to
others such as banks, brokers, dealers and trust companies that clear through or
maintain a custodial relationship with a participant, whether directly or
indirectly.
Initial settlement in the New Notes will be in same-day funds.
Investors holding their New Notes through the Depositary will follow settlement
practices applicable to United States corporate debt obligations. The Indenture
requires that payments in respect of Notes (including principal, premium and
interest) be made by wire
<PAGE> 64
56
transfer of same-day funds to the accounts specified by the holders thereof or,
if no such account is specified, by mailing a check to each such holder's
registered address.
CHANGE OF CONTROL
Upon the occurrence of any of the following events (each a "Change of
Control"), each Holder shall have the right to require that the Company purchase
such Holder's Notes at a purchase price in cash equal to 101% of the Accreted
Value thereof plus accrued and unpaid interest, if any, to the date of purchase
(subject to the right of Holders of record on the relevant record date to
receive interest due on the relevant interest payment date):
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in Rules 13d-3 and 13d-5
under the Exchange Act except that for purposes of this clause (i) such
person shall be deemed to have "beneficial ownership" of all shares
that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the Voting
Stock of the Company; provided, however, that the Permitted Holders
beneficially own (as defined in Rules 13d-3 and 13d-5 under the
Exchange Act), directly or indirectly, in the aggregate a lesser
percentage of the total voting power of the Voting Stock of the Company
than such other person and do not have the right or ability by voting
power, contract or otherwise to elect or designate for election a
majority of the Board of Directors (for the purposes of this clause
(i), a person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting power of the
Voting Stock of such parent corporation and the Permitted Holders
beneficially own (as defined in this clause (i)), directly or
indirectly, in the aggregate a lesser percentage of the voting power of
the Voting Stock of such parent corporation and do not have the right
or ability by voting power, contract or otherwise to elect or designate
for election a majority of the board of directors of such parent
corporation);
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new or replacement directors whose election by such
Board of Directors or whose nomination for election by the shareholders
of the Company was approved by a vote of 66 2/3% of the directors of
the Company then still in office who were either directors at the
beginning of such period or whose election or nomination for election
was previously so approved) cease for any reason to constitute a
majority of the Board of Directors then in office; or
(iii) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving Person
or transferee that represent, immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of
the surviving Person or transferee.
Within 30 days following any Change of Control, the Company shall mail
a notice to each Holder with a copy to the Trustee stating: (1) that a Change of
Control has occurred and that such Holder has the right to require the Company
to purchase such Holder's Notes at a purchase price in cash equal to 101% of the
Accreted Value thereof plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of Holders of record on the relevant record date
to receive interest on the relevant interest payment date); (2) the
circumstances and relevant facts regarding such Change of Control (including
information with respect to pro forma historical income, cash flow and
capitalization after giving effect to such Change of Control); (3) the purchase
date (which shall be no earlier than 30 days nor later than 60 days from the
date such notice is mailed); and (4) the instructions determined
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57
by the Company, consistent with the covenant described hereunder, that a Holder
must follow in order to have its Notes purchased.
The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the purchase of Notes pursuant to this
covenant described hereunder. To the extent that the provisions of any
securities laws or regulations conflict with the provisions of the covenant
described hereunder, the Company shall comply with the applicable securities
laws and regulations and shall not be deemed to have breached its obligations
under the covenant described hereunder by virtue thereof.
The Change of Control purchase feature is a result of negotiations
between the Company and the Initial Purchasers. Management has no present
intention to engage in a transaction involving a Change of Control, although it
is possible that the Company would decide to do so in the future. Subject to the
limitations discussed below, the Company could, in the future, enter into
certain transactions, including acquisitions, refinancings or other
recapitalizations, that would not constitute a Change of Control under the
Indenture, but that could increase the amount of indebtedness outstanding at
such time or otherwise affect the Company's capital structure or credit ratings.
Restrictions on the ability of the Company to incur additional Indebtedness are
contained in the covenants described under " -- Certain Covenants -- Limitation
on Indebtedness", " -- Limitation on Preferred Stock of Restricted
Subsidiaries", " -- Limitation on Liens" and " -- Limitation on Sale/Leaseback
Transactions". Such restrictions can only be waived with the consent of the
holders of a majority in principal amount at maturity of the Notes then
outstanding. Except for the limitations contained in such covenants, however,
the Indenture will not contain any covenants or provisions that may afford
holders of the Notes protection in the event of a highly leveraged transaction.
Future indebtedness of the Company may contain prohibitions on the
occurrence of certain events that would constitute a Change of Control or
require such indebtedness to be purchased upon a Change of Control. Moreover,
the exercise by the holders of their right to require the Company to purchase
the Notes could cause a default under such indebtedness, even if the Change of
Control itself does not, due to the financial effect of such purchase on the
Company. Finally, the Company's ability to pay cash to the holders of Notes
following the occurrence of a Change of Control may be limited by the Company's
then existing financial resources. There can be no assurance that sufficient
funds will be available when necessary to make any required purchases. The
provisions under the Indenture relative to the Company's obligation to make an
offer to purchase the Notes as a result of a Change of Control may be waived or
modified with the written consent of the holders of a majority in principal
amount at maturity of the Notes.
CERTAIN COVENANTS
The Indenture contains certain covenants including, among others, the
following:
Limitation on Indebtedness. (a) The Company shall not Incur, and shall
not permit any Restricted Subsidiary to Incur, directly or indirectly, any
Indebtedness unless, on the date of such Incurrence and after giving effect
thereto, the Consolidated Leverage Ratio is less than 7.0 to 1.0 if such
Indebtedness is Incurred prior to February 1, 2000, or 5.0 to 1.0 if such
Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company and any
Restricted Subsidiary may Incur any or all of the following Indebtedness:
(1) Indebtedness Incurred pursuant to any credit agreement or
Incurred by any Foreign Subsidiary; provided, however, that (i) after
giving effect to any such Incurrence the aggregate principal amount of
all such Indebtedness then outstanding does not exceed the sum of (w)
65% of the book value of the inventory of the Company and its
Restricted Subsidiaries and (x) 85% of the book value of the accounts
receivables of the Company and its Restricted Subsidiaries, (ii) in the
case of any Indebtedness Incurred by a Foreign Subsidiary, after giving
effect to such Incurrence the aggregate amount of all such Indebtedness
then outstanding does not exceed the sum of (y) 65% of the book value
of the inventory of such Foreign
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58
Subsidiary and (z) 85% of the book value of the accounts receivables of
such Foreign Subsidiary, and (iii) notwithstanding the limitations in
amount contained in (i) and (ii) above, the Company and its Restricted
Subsidiaries may Incur Indebtedness pursuant to this clause (1) in an
aggregate amount not to exceed $10.0 million at any time outstanding;
(2) Indebtedness owed to and held by the Company or a Wholly
Owned Subsidiary; provided, however, that any subsequent issuance or
transfer of any Capital Stock which results in any such Wholly Owned
Subsidiary ceasing to be a Wholly Owned Subsidiary or any subsequent
transfer of such Indebtedness (other than to the Company or another
Wholly Owned Subsidiary) shall be deemed, in each case, to constitute
the Incurrence of such Indebtedness by the issuer thereof;
(3) the Notes and the New Notes and Guarantees thereof;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this paragraph
(b)), including the CDA Note;
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to paragraph (a), or pursuant to clause (3) or (4) of
this paragraph (b) or this clause (5);
(6) Indebtedness (including Capital Lease Obligations) of the
Company or any Restricted Subsidiary financing the purchase, lease or
improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any
Person owning such assets), in each case incurred no more than 180 days
after such purchase, lease or improvement of such property and any
Refinancing Indebtedness in respect of such Indebtedness; provided,
however, that (i) the amount of such Indebtedness (net of original
issue discount) does not exceed, at the time initially Incurred, 90% of
the fair market value of such acquired property or equipment and (ii)
at the time of the Incurrence of such Indebtedness and after giving
effect thereto, the aggregate amount of all Indebtedness Incurred
pursuant to this clause (6) and then outstanding shall not exceed $10.0
million;
(7) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and the Restricted Subsidiaries pursuant to the Indenture;
(8) Indebtedness consisting of performance, surety or appeal
bonds obtained by the Company or a Restricted Subsidiary in the
ordinary course of business;
(9) Indebtedness consisting of self-insurance obligations; and
(10) Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company and the Restricted
Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (9) above or paragraph
(a)), does not exceed $5.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur any
Indebtedness pursuant to the foregoing paragraph (b) if the proceeds thereof are
used, directly or indirectly, to Refinance any Subordinated Obligations unless
such Indebtedness shall be subordinated to the Notes to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with the foregoing covenant,
(i) in the event that an item of Indebtedness meets the criteria of more than
one of the types of Indebtedness described above, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(ii) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described above.
Limitation on Preferred Stock of Restricted Subsidiaries. The Company
shall not permit any Restricted Subsidiary (other than a Joint Venture) to
Incur, directly or indirectly, any Preferred Stock except:
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59
(a) Preferred Stock issued to and held by the Company or a Wholly Owned
Subsidiary; provided, however, that any subsequent issuance or transfer of any
Capital Stock which results in any such Wholly Owned Subsidiary ceasing to be a
Wholly Owned Subsidiary or any subsequent transfer of such Preferred Stock
(other than to the Company or a Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the issuance of such Preferred Stock by the issuer
thereof;
(b) Preferred Stock of a Subsidiary Incurred and outstanding on or
prior to the date on which such Subsidiary was acquired by the Company (other
than Preferred Stock Incurred in connection with, or to provide all or any
portion of the funds or credit support utilized to consummate, the transaction
or series of related transactions pursuant to which such Subsidiary became a
Subsidiary or was acquired by the Company); provided, however, that on the date
of such acquisition and after giving effect thereto, the Company would have been
able to Incur at least $1.00 of additional Indebtedness pursuant to clause (a)
of the covenant described under " -- Limitation on Indebtedness";
(c) Preferred Stock outstanding on the Issue Date (other than Preferred
Stock described in clause (a) or (b) of this paragraph); and
(d) Preferred Stock Incurred to Refinance Preferred Stock referred to
in clause (b) or (c) of this paragraph or this clause (d); provided, however,
that to the extent such Preferred Stock directly or indirectly Refinances
Preferred Stock of a Subsidiary described in clause (b), such Preferred Stock
shall be Incurred only by such Subsidiary.
Limitation on Restricted Payments. (a) The Company shall not, and shall
not permit any Restricted Subsidiary, directly or indirectly, to, make a
Restricted Payment if at the time the Company or such Restricted Subsidiary
makes such Restricted Payment: (1) a Default shall have occurred and be
continuing (or would result therefrom); (2) the Company is not able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under " -- Limitation on Indebtedness"; or (3) the aggregate amount of
such Restricted Payment and all other Restricted Payments since the Issue Date
would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during the
period (treated as one accounting period) from the beginning of the
fiscal quarter immediately following the fiscal quarter during which
the Old Notes are originally issued to the end of the most recent
fiscal quarter ending at least 45 days prior to the date of such
Restricted Payment (or, in case such Consolidated Net Income shall be a
deficit, minus 100% of such deficit);
(B) the aggregate Net Cash Proceeds received by the Company
from the issuance or sale of its Capital Stock (other than Disqualified
Stock) subsequent to the Issue Date (other than an issuance or sale to
a Subsidiary of the Company and other than an issuance or sale to an
employee stock ownership plan or to a trust established by the Company
or any of its Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company is reduced
on the Company's balance sheet upon the conversion or exchange (other
than by a Subsidiary of the Company) subsequent to the Issue Date, of
any Indebtedness of the Company convertible or exchangeable for Capital
Stock (other than Disqualified Stock) of the Company (less the amount
of any cash, or the fair value of any other property, distributed by
the Company upon such conversion or exchange) and the net cash proceeds
received by the Company from the issuance of Disqualified Stock (other
than Indebtedness) of the Company to the extent such Disqualified Stock
has been converted or exchanged (other than by a Subsidiary of the
Company) subsequent to the Issue Date for Capital Stock (other than
Disqualified Stock) of the Company (less the amount of any cash, or the
fair value of any other property, distributed by the Company upon such
conversion or exchange);
(D) an amount equal to the sum of (i) the net reduction in
Investments in Unrestricted Subsidiaries resulting from dividends,
repayments of loans or advances or other transfers of assets, in each
case to the Company or any Restricted Subsidiary from Unrestricted
Subsidiaries, and (ii) the portion (proportionate to
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60
the Company's equity interest in such Subsidiary) of the fair market
value of the net assets of an Unrestricted Subsidiary at the time such
Unrestricted Subsidiary is designated a Restricted Subsidiary;
provided, however, that the foregoing sum shall not exceed, in the case
of any Unrestricted Subsidiary, the amount of Investments previously
made (and treated as a Restricted Payment) by the Company or any
Restricted Subsidiary in such Unrestricted Subsidiary; and
(E) $2.0 million.
(b) The provisions of the foregoing paragraph (a) shall not prohibit:
(i) any Restricted Payment made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock
issued or sold to a Subsidiary of the Company or an employee stock
ownership plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however,
that (A) such Restricted Payment shall be excluded in the calculation
of the amount of Restricted Payments and (B) the Net Cash Proceeds from
such sale shall be excluded from the calculation of amounts under
clause (3)(B) of paragraph (a) above;
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Indebtedness of the Company which is permitted to be Incurred
pursuant to the covenant described under " -- Limitation on
Indebtedness"; provided, however, that such purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value
shall be excluded in the calculation of the amount of Restricted
Payments;
(iii) dividends paid within 60 days after the date of
declaration thereof if at such date of declaration such dividend would
have complied with this covenant; provided, however, that at the time
of payment of such dividend, no other Default shall have occurred and
be continuing (or result therefrom); provided further, however, that
such dividend shall be included in the calculation of the amount of
Restricted Payments;
(iv) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, consultants, former
consultants, directors or former directors of the Company or any of its
Subsidiaries (or permitted transferees of such employees, former
employees, consultants, former consultants, directors or former
directors), pursuant to the terms of the agreements (including
employment or consulting agreements) or plans (or amendments thereto)
approved by the Board of Directors under which such individuals
purchase or sell or are granted the option to purchase or sell shares
of such common stock or as otherwise approved by the Board of
Directors; provided, however, that the aggregate amount of such
repurchases and other acquisitions shall not exceed $1.0 million in any
calendar year; provided further, however, that such repurchases and
other acquisitions shall be excluded in the calculation of the amount
of Restricted Payments;
(v) payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger
or transfer of assets that complies with the provisions of the
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; provided,
however, that such payments or distributions from and after the Issue
Date shall not in the aggregate exceed $2.0 million; provided further,
however, that such payments and distributions shall be included in the
calculation of the amount of Restricted Payments; or
(vi) Investments in Joint Ventures; provided, however, that
the aggregate amount of all such Investments pursuant to this clause
(vi) shall not exceed $10.0 million; provided further, however, that
such Investments pursuant to this clause (vi) shall be excluded in the
calculation of the amount of Restricted Payments.
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61
Limitation on Restrictions on Distributions from Restricted
Subsidiaries. The Company shall not, and shall not permit any Restricted
Subsidiary to, create or otherwise cause or permit to exist or become effective
any consensual encumbrance or restriction on the ability of any Restricted
Subsidiary (a) to pay dividends or make any other distributions on its Capital
Stock to the Company or a Restricted Subsidiary or pay any Indebtedness owed to
the Company, (b) to make any loans or advances to the Company or (c) transfer
any of its Property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement in
effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction arising under or by reason
of applicable law;
(iii) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(iv) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (iii) of this covenant or this
clause (iv) or contained in any amendment to an agreement referred to
in clause (i) or (iii) of this covenant or this clause (iv); provided,
however, that the encumbrances and restrictions with respect to such
Restricted Subsidiary contained in any such refinancing agreement or
amendment are no less favorable in any material respect to the
Noteholders than encumbrances and restrictions with respect to such
Restricted Subsidiary contained in such predecessor agreements;
(v) any such encumbrance or restriction consisting of
customary non-assignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
(vi) in the case of clause (c) above, (A) any restriction
arising in connection with any Permitted Lien to the extent such
restriction restricts the transfer of the Property or the assets
subject to such Permitted Lien, including the transfer of such Property
or assets upon the foreclosure thereof, (B) restrictions existing by
virtue of any transfer of, agreement to transfer or option or right
with respect to any Property or assets of the Company or any Restricted
Subsidiary or (C) restrictions arising or agreed to in the ordinary
course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of the
Property or assets subject thereto in any manner material to the
Company or any Restricted Subsidiary taken as a whole; and
(vii) any restriction with respect to a Restricted Subsidiary
imposed pursuant to an agreement entered into for the sale or
disposition of all or substantially all the Capital Stock or assets of
such Restricted Subsidiary pending the closing of such sale or
disposition.
Limitation on Sales of Assets and Subsidiary Stock. (a) The Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, consummate any Asset Disposition unless (i) the Company or such
Restricted Subsidiary receives consideration at the time of such Asset
Disposition at least equal to the fair market value (including as to the value
of all non-cash consideration), as determined in good faith by the Board of
Directors, of the shares and assets subject to such Asset Disposition and at
least 80% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent the Company elects (or is required by the terms of any
Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness or
Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary
(in each case other than Indebtedness owed to the Company or
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62
an Affiliate of the Company) within one year from the later of the date of such
Asset Disposition or the receipt of such Net Available Cash; (B) second, to the
extent of the balance of such Net Available Cash after application in accordance
with clause (A), to the extent the Company elects, to acquire Additional Assets
within one year from the later of the date of such Asset Disposition or the
receipt of such Net Available Cash; (C) third, to the extent of the balance of
such Net Available Cash after application in accordance with clauses (A) and
(B), to make an offer to the holders of the Notes (and to holders of other
Senior Indebtedness designated by the Company) to purchase Notes (and such other
Senior Indebtedness) pursuant to and subject the conditions contained in the
Indenture; and (D) fourth, to the extent of the balance of such Net Available
Cash in excess of $200,000 in any fiscal year after application in accordance
with clauses (A), (B) and (C), to (x) the acquisition by the Company or any
Wholly Owned Subsidiary of Additional Assets or (y) the prepayment, repayment or
purchase of Indebtedness (other than any Disqualified Stock) of the Company
(other than Indebtedness owed to an Affiliate of the Company) or Indebtedness of
any Subsidiary (other than Indebtedness owed to the Company or an Affiliate of
the Company), in each case within one year from the later of the receipt of such
Net Available Cash and the date the offer described in clause (b) below is
consummated; provided, however, that in connection with any prepayment,
repayment or purchase of Indebtedness pursuant to clause (A), (C) or (D) above,
the Company or such Restricted Subsidiary shall permanently retire such
Indebtedness and shall cause the related loan commitment (if any) to be
permanently reduced in an amount equal to the principal amount so prepaid,
repaid or purchased. Notwithstanding the foregoing provisions of this paragraph,
the Company and the Restricted Subsidiaries shall not be required to apply any
Net Available Cash in accordance with this paragraph except to the extent that
the aggregate Net Available Cash from all Asset Dispositions which are not
applied in accordance with this paragraph exceeds $5.0 million. Pending
application of Net Available Cash pursuant to this covenant, such Net Available
Cash shall be invested in Permitted Investments.
For the purposes of this covenant, the following are deemed to be cash
or cash equivalents: (x) the assumption of Indebtedness of the Company or any
Restricted Subsidiary and the release of the Company or such Restricted
Subsidiary from all liability on such Indebtedness in connection with such Asset
Disposition and (y) securities received by the Company or any Restricted
Subsidiary from the transferee that are promptly converted by the Company or
such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the purchase of
the Notes (and other Senior Indebtedness) pursuant to clause (a)(ii)(C) above,
the Company will be required to purchase Notes tendered pursuant to an offer by
the Company for the Notes (and other Senior Indebtedness) at a purchase price of
100% of their Accreted Value plus accrued but unpaid interest, if any (or, in
respect of such other Senior Indebtedness, 100% of their accreted value or
principal amount (without premium), as the case may be, plus accrued but unpaid
interest, if any or such lesser price, if any, as may be provided for by the
terms of such Senior Indebtedness) in accordance with the procedures (including
prorating in the event of oversubscription) set forth in the Indenture. If the
aggregate purchase price of Notes (and any other Senior Indebtedness) tendered
pursuant to such offer is less than the Net Available Cash allotted to the
purchase thereof, the Company will be required to apply the remaining Net
Available Cash in accordance with clause (a)(ii)(D) above. The Company shall not
be required to make such an offer to purchase Notes (and other Senior
Indebtedness) pursuant to this covenant if the Net Available Cash available
therefor is less than $5.0 million (which lesser amount shall be carried forward
for purposes of determining whether such an offer is required with respect to
any subsequent Asset Disposition).
(c) The Company shall comply, to the extent applicable, with the
requirements of Section 14(e) of the Exchange Act and any other securities laws
or regulations in connection with the purchase of Notes pursuant to this
covenant. To the extent that the provisions of any securities laws or
regulations conflict with provisions of this covenant, the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this clause by virtue thereof.
Limitation on Affiliate Transactions. (a) The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into or permit to exist any
transaction (including the purchase, sale, lease or exchange of any property,
employee compensation arrangements or the rendering of any service) with any
Affiliate of the Company (an "Affiliate Transaction") unless the terms thereof
(1) are no less favorable to the Company or such Restricted Subsidiary than
those that could be obtained at the time of such transaction in arm's-length
dealings with a Person
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who is not such an Affiliate, (2) with respect to any such Affiliate Transaction
that involves an amount in excess of $1.0 million, are set forth in writing and
have been approved by a majority of the members of the Board of Directors having
no personal stake in such Affiliate Transaction and (3) with respect to any
Affiliate Transaction that involves an amount in excess of $10.0 million, have
been determined by (A) a nationally recognized investment banking firm to be
fair from a financial standpoint to the Company or such Restricted Subsidiary or
(B) an appraisal firm nationally recognized in making such determinations to be
on terms that are not less favorable to the Company or such Restricted
Subsidiary than the terms that could be obtained in an arms-length transaction
from a Person that is not an Affiliate of the Company.
(b) The provisions of the foregoing paragraph (a) shall not prohibit
(i) any Restricted Payment permitted to be paid pursuant to the covenant
described under " -- Limitation on Restricted Payments", (ii) any issuance of
securities or other payments, awards or grants in cash, securities or otherwise
pursuant to, or the funding of, employment arrangements, stock options and stock
ownership plans approved by the Board of Directors, (iii) the grant of stock
options or similar rights to employees and directors of the Company and its
Restricted Subsidiaries pursuant to plans approved by the Board of Directors,
(iv) loans or advances to employees in the ordinary course of business, but in
any event not to exceed $1.0 million in the aggregate outstanding at any one
time, (v) the payment of reasonable fees to directors of the Company and its
Restricted Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a Wholly
Owned Subsidiary or between Wholly Owned Subsidiaries, (vii) any Affiliate
Transaction entered into prior to the Issue Date or the renewal thereof upon
substantially similar terms or (viii) indemnification payments to directors and
officers of the Company and its Restricted Subsidiaries in accordance with
applicable state laws.
Limitation on the Sale or Issuance of Capital Stock of Restricted
Subsidiaries. The Company shall not sell or otherwise dispose of any Capital
Stock of a Restricted Subsidiary (other than a Joint Venture), and shall not
permit any Restricted Subsidiary (other than a Joint Venture), directly or
indirectly, to issue or sell or otherwise dispose of any of its Capital Stock,
except (i) to the Company or a Wholly Owned Subsidiary, (ii) if, immediately
after giving effect to such issuance, sale or other disposition, neither the
Company nor any of its Subsidiaries own any Capital Stock of such Restricted
Subsidiary or (iii) if, immediately after giving effect to such issuance, sale
or other disposition, such Restricted Subsidiary would no longer constitute a
Restricted Subsidiary and any Investment in such Person remaining after giving
effect thereto would have been permitted to be made under the covenant described
under " -- Limitation on Restricted Payments" if made on the date of such
issuance, sale or other disposition.
Limitation On Liens. The Company shall not, and shall not permit any
Restricted Subsidiary to, directly or indirectly, Incur or permit to exist any
Lien of any nature whatsoever on any of its properties (including Capital Stock
of a Restricted Subsidiary), whether owned at the Issue Date or thereafter
acquired, other than Permitted Liens, without effectively providing that the
Notes shall be secured equally and ratably with (or prior to) the obligations so
secured for so long as such obligations are so secured.
Limitation on Sale/Leaseback Transactions. The Company shall not, and
shall not permit any Restricted Subsidiary to, enter into any Sale/Leaseback
Transaction with respect to any property unless (i) the Company or such
Subsidiary would be entitled to (A) Incur Indebtedness in an amount equal to the
Attributable Debt with respect to such Sale/Leaseback Transaction pursuant to
the covenant described under " -- Limitation on Indebtedness" and (B) create a
Lien on such property securing such Attributable Debt without equally and
ratably securing the Notes pursuant to the covenant described under " --
Limitation on Liens", (ii) the net proceeds received by the Company or any
Restricted Subsidiary in connection with such Sale/Leaseback Transaction are at
least equal to the fair value (as determined by the Board of Directors) of such
property and (iii) the Company applies the proceeds of such transaction in
compliance with the covenant described under " -- Limitation on Sale of Assets
and Subsidiary Stock". The foregoing restriction shall not apply to any
Sale-Leaseback Transaction if (i) the lease is for a period, including renewal
rights, of not in excess of three years or (ii) the transaction is between the
Company and any Wholly Owned Subsidiary or between Wholly Owned Subsidiaries.
Limitation on Lines of Business. The Company shall not, and shall not
permit any Restricted Subsidiary to, directly or indirectly, engage in any
business other than a Related Business.
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64
Merger and Consolidation. The Company shall not consolidate with or
merge with or into, or convey, transfer or lease, in one transaction or a series
of transactions, all or substantially all its assets to, any Person, unless: (i)
the resulting, surviving or transferee Person (the "Successor Company") shall be
a Person organized and existing under the laws of the United States of America,
any State thereof or the District of Columbia and the Successor Company (if not
the Company) shall expressly assume, by an indenture supplemental thereto,
executed and delivered to the Trustee, in form reasonably satisfactory to the
Trustee, all the obligations of the Company under the Notes and the Indenture;
(ii) immediately after giving effect to such transaction (and treating any
Indebtedness which becomes an obligation of the Successor Company or any
Subsidiary as a result of such transaction as having been Incurred by such
Successor Company or such Subsidiary at the time of such transaction), no
Default shall have occurred and be continuing; (iii) immediately after giving
effect to such transaction, the Successor Company would be able to Incur an
additional $1.00 of Indebtedness pursuant to paragraph (a) of the covenant
described under " -- Limitation on Indebtedness"; (iv) immediately after giving
effect to such transaction, the Successor Company shall have Consolidated Net
Worth in an amount that is not less than the Consolidated Net Worth of the
Company prior to such transaction; provided, however, that this clause (iv)
shall not apply to a consolidation or merger with or into a Wholly Owned
Subsidiary if, in connection with any such merger or consolidation, no
consideration (other than Common Stock in the Successor Company (or a Person
that owns directly or indirectly all of the Capital Stock of the Successor
Company immediately following such transaction)) shall be issued or distributed
to the stockholders of the Company; and (v) the Company shall have delivered to
the Trustee an Officers' Certificate and an Opinion of Counsel, each stating
that such consolidation, merger or transfer and such supplemental indenture (if
any) comply with the Indenture; provided, however, that clauses (iii) and (iv)
above shall not apply if, in the good faith determination of the Board of
Directors, whose determination shall be evidenced by a resolution of the Board
of Directors, the principal purpose and effect of such transaction is to change
the state of incorporation of the Company.
The Successor Company shall be the successor to the Company and shall
succeed to, and be substituted for, and may exercise every right and power of,
the Company under the Indenture, but the predecessor Company in the case of a
conveyance, transfer or lease shall not be released from the obligation to pay
the principal of and interest on the Notes.
The Company will not permit any Subsidiary Guarantor to consolidate
with or merge with or into, or convey, transfer or lease, in one transaction or
a series of transactions, all or substantially all of its assets to any Person
unless: (i) the resulting, surviving or transferee Person (if not such
Subsidiary Guarantor) shall be a Person organized and existing under the laws of
the jurisdiction under which such Subsidiary Guarantor was organized or under
the laws of the United States of America, or any State thereof or the District
of Columbia, and such Person shall expressly assume, by a Guaranty Agreement, in
a form reasonably satisfactory to the Trustee, all the obligations of such
Subsidiary Guarantor, if any, under its Subsidiary Guaranty; (ii) immediately
after giving effect to such transaction or transactions on a pro forma basis
(and treating any Indebtedness which becomes an obligation of the resulting,
surviving or transferee Person as a result of such transaction as having been
Incurred by such Person at the time of such transaction), no Default shall have
occurred and be continuing; and (iii) the Company delivers to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer, if any, complies with the Indenture.
Future Guarantors. In the event that, after the Issue Date, a
Restricted Subsidiary Incurs any Indebtedness pursuant to paragraph (a) or
pursuant to paragraph (b) (1) (but, in the case of a Foreign Subsidiary, only in
the case of Indebtedness Incurred pursuant to clause (i) thereof), (b)(5) (but
only in the case of Refinancing Indebtedness with respect to Indebtedness
Incurred pursuant to paragraph (a)) or (b)(10), in each case of the covenant
described under " -- Limitation on Indebtedness", the Company shall cause such
Restricted Subsidiary to Guarantee the Notes pursuant to a Subsidiary Guaranty
on the terms and conditions set forth in the Indenture and shall cause all
Indebtedness of such Restricted Subsidiary owing to the Company or any other
Subsidiary of the Company and not previously discharged to be converted into
Capital Stock of such Restricted Subsidiary (other than Disqualified Stock).
SEC Reports. Notwithstanding that the Company may not be required to
remain subject to the reporting requirements of Section 13 or 15(d) of the
Exchange Act, the Company shall file with the SEC and provide the
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Trustee and Noteholders with such annual reports and such information, documents
and other reports as are specified in Sections 13 and 15(d) of the Exchange Act
and applicable to a U.S. corporation subject to such Sections, such information,
documents and other reports to be so filed and provided at the times specified
for the filing of such information, documents and reports under such Sections.
DEFAULTS
An Event of Default is defined in the Indenture as (i) a default in the
payment of interest on the Notes when due, continued for 30 days, (ii) a default
in the payment of principal of any Note when due at its Stated Maturity, upon
optional redemption, upon required repurchase, upon declaration or otherwise,
(iii) the failure by the Company to comply with its obligations under " --
Certain Covenants -- Merger and Consolidation" above, (iv) the failure by the
Company to comply for 30 days after notice with any of its obligations in the
covenants described above under "Change of Control" (other than a failure to
purchase Notes) or under " -- Certain Covenants" under " -- Limitation on
Indebtedness", " -- Limitation on Preferred Stock of Restricted Subsidiaries", "
- -- Limitation on Restricted Payments", " -- Limitation on Restrictions on
Distributions from Restricted Subsidiaries", " -- Limitation on Sales of Assets
and Subsidiary Stock" (other than a failure to purchase Notes), " -- Limitation
on Affiliate Transactions", " -- Limitation on the Sale or Issuance of Capital
Stock of Restricted Subsidiaries", " -- Limitation on Liens", " -- Limitation on
Sale/Leaseback Transactions", " -- Limitation on Lines of Business", " -- Future
Guarantors" or " -- SEC Reports", (v) the failure by the Company to comply for
60 days after notice with its other agreements contained in the Indenture, (vi)
Indebtedness of the Company or any Significant Subsidiary is not paid within any
applicable grace period after final maturity or is accelerated by the holders
thereof because of a default and the total amount of such Indebtedness unpaid or
accelerated exceeds $10.0 million (the "cross acceleration provision"), (vii)
the occurrence of certain events of bankruptcy, insolvency or reorganization of
the Company or a Significant Subsidiary (the "bankruptcy provisions") or (viii)
any judgment or decree for the payment of money in excess of $10.0 million is
rendered against the Company or a Significant Subsidiary, remains outstanding
for a period of 60 days following such judgment and is not discharged, waived or
stayed within 10 days after notice (the "judgment default provision") or (ix) a
Subsidiary Guaranty ceases to be in full force and effect (other than in
accordance with the terms of such Subsidiary Guaranty) or a Subsidiary Guarantor
denies or disaffirms its obligations under its Subsidiary Guaranty. However, a
default under clauses (iv), (v) or (viii) will not constitute an Event of
Default until the Trustee or the holders of 25% in principal amount at maturity
of the outstanding Notes notify the Company of the default and the Company does
not cure such default within the time specified after receipt of such notice.
If an Event of Default occurs and is continuing, the Trustee or the
holders of at least 25% in principal amount at maturity of the outstanding Notes
may declare the Accreted Value of and accrued but unpaid interest, if any, on
all the Notes to be due and payable (collectively, the "Default Amount"). Upon
such a declaration, the Default Amount shall be due and payable immediately. If
an Event of Default relating to certain events of bankruptcy, insolvency or
reorganization of the Company occurs and is continuing, the Default Amount on
all the Notes will ipso facto become and be immediately due and payable without
any declaration or other act on the part of the Trustee or any holders of the
Notes. Under certain circumstances, the holders of a majority in principal
amount at maturity of the outstanding Notes may rescind any such acceleration
with respect to the Notes and its consequences.
Subject to the provisions of the Indenture relating to the duties of
the Trustee, in case an Event of Default occurs and is continuing, the Trustee
will be under no obligation to exercise any of the rights or powers under the
Indenture at the request or direction of any of the holders of the Notes unless
such holders have offered to the Trustee reasonable indemnity or security
against any loss, liability or expense. Except to enforce the right to receive
payment of principal, premium (if any) or interest when due, no holder of a Note
may pursue any remedy with respect to the Indenture or the Notes unless (i) such
holder has previously given the Trustee notice that an Event of Default is
continuing, (ii) holders of at least 25% in principal amount at maturity of the
outstanding Notes have requested the Trustee to pursue the remedy, (iii) such
holders have offered the Trustee reasonable security or indemnity against any
loss, liability or expense, (iv) the Trustee has not complied with such request
within 60 days after the receipt thereof and the offer of security or indemnity
and (v) the holders of a majority in principal amount at maturity of the
outstanding Notes have not given the Trustee a direction inconsistent with such
request within
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such 60-day period. Subject to certain restrictions, the holders of a majority
in principal amount at maturity of the outstanding Notes are given the right to
direct the time, method and place of conducting any proceeding for any remedy
available to the Trustee or of exercising any trust or power conferred on the
Trustee. The Trustee, however, may refuse to follow any direction that conflicts
with law or the Indenture or that the Trustee determines is unduly prejudicial
to the rights of any other holder of a Note or that would involve the Trustee in
personal liability.
The Indenture provides that if a Default occurs and is continuing and
is known to the Trustee, the Trustee must mail to each holder of the Notes
notice of the Default within 90 days after it occurs. Except in the case of a
Default in the payment of principal of or interest on any Note, the Trustee may
withhold notice if and so long as a committee of its trust officers determines
that withholding notice is not opposed to the interest of the holders of the
Notes. In addition, the Company is required to deliver to the Trustee, within
120 days after the end of each fiscal year, a certificate indicating whether the
signers thereof know of any Default that occurred during the previous year. The
Company also is required to deliver to the Trustee, within 30 days after the
occurrence thereof, written notice of any event which would constitute certain
Defaults, their status and what action the Company is taking or proposes to take
in respect thereof.
AMENDMENTS AND WAIVERS
Subject to certain exceptions, the Indenture may be amended with the
consent of the holders of a majority in principal amount at maturity of the
Notes then outstanding (including consents obtained in connection with a tender
offer or exchange for the Notes) and any past default or compliance with any
provisions may also be waived with the consent of the holders of a majority in
principal amount at maturity of the Notes then outstanding. However, without the
consent of each holder of an outstanding Note affected thereby, no amendment
may, among other things, (i) reduce the amount of Notes whose holders must
consent to an amendment, (ii) reduce the rate of or extend the time for payment
of interest on any Note, (iii) reduce the principal or Accreted Value of or
extend the Stated Maturity of any Note, (iv) reduce the premium payable upon the
redemption of any Note or change the time at which any Note may be redeemed as
described under " -- Optional Redemption", (v) make any Note payable in money
other than that stated in the Note, (vi) impair the right of any holder of the
Notes to receive payment of principal of and interest on such holder's Notes on
or after the due dates therefor or to institute suit for the enforcement of any
payment on or with respect to such holder's Notes, (vii) make any change in the
amendment provisions which require each holder's consent or in the waiver
provisions or (viii) make any change in any Subsidiary Guaranty that would
adversely affect the Noteholders.
Without the consent of any holder of the Notes, the Company and Trustee
may amend the Indenture to cure any ambiguity, omission, defect or
inconsistency, to provide for the assumption by a successor corporation of the
obligations of the Company under the Indenture, to provide for uncertificated
Notes in addition to or in place of certificated Notes (provided that the
uncertificated Notes are issued in registered form for purposes of Section
163(f) of the Code, or in a manner such that the uncertificated Notes are
described in Section 163(f)(2)(B) of the Code), to add guarantees with respect
to the Notes, to secure the Notes, to add to the covenants of the Company for
the benefit of the holders of the Notes or to surrender any right or power
conferred upon the Company, to make any change that does not adversely affect
the rights of any holder of the Notes or to comply with any requirement of the
SEC in connection with the qualification of the Indenture under the Trust
Indenture Act.
The consent of the holders of the Notes is not necessary under the
Indenture to approve the particular form of any proposed amendment. It is
sufficient if such consent approves the substance of the proposed amendment.
After an amendment under the Indenture becomes effective, the Company
is required to mail to holders of the Notes a notice briefly describing such
amendment. However, the failure to give such notice to all holders of the Notes,
or any defect therein, will not impair or affect the validity of the amendment.
DEFEASANCE
The Company at any time may terminate all its obligations under the
Notes and the Indenture ("legal defeasance"), except for certain obligations,
including those respecting the defeasance trust and obligations to
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register the transfer or exchange of the Notes, to replace mutilated, destroyed,
lost or stolen Notes and to maintain a registrar and paying agent in respect of
the Notes. The Company at any time may terminate its obligations under " --
Change of Control" and under the covenants described under " -- Certain
Covenants" (other than the covenant described under " -- Merger and
Consolidation"), the operation of the cross acceleration provision, the
bankruptcy provisions with respect to Significant Subsidiaries and the judgment
default provision described under " -- Defaults" above and the limitations
contained in clauses (iii) and (iv) under " -- Certain Covenants -- Merger and
Consolidation" above ("covenant defeasance").
The Company may exercise its legal defeasance option notwithstanding
its prior exercise of its covenant defeasance option. If the Company exercises
its legal defeasance option, payment of the Notes may not be accelerated because
of an Event of Default with respect thereto. If the Company exercises its
covenant defeasance option, payment of the Notes may not be accelerated because
of an Event of Default specified in clause (iv), (vi), (vii) (with respect only
to Significant Subsidiaries) or (viii) under " -- Defaults" above or because of
the failure of the Company to comply with clause (iii) or (iv) under " --
Certain Covenants -- Merger and Consolidation" above. If the Company exercises
its legal defeasance option or its covenant defeasance option, each Subsidiary
Guarantor will be released from all of its obligations with respect to its
Subsidiary Guaranty.
In order to exercise either defeasance option, the Company must
irrevocably deposit in trust (the "defeasance trust") with the Trustee money or
U.S. Government Obligations for the payment of principal and interest on the
Notes to redemption or maturity, as the case may be, and must comply with
certain other conditions, including delivery to the Trustee of an Opinion of
Counsel to the effect that holders of the Notes will not recognize income, gain
or loss for Federal income tax purposes as a result of such deposit and
defeasance and will be subject to Federal income tax on the same amount and in
the same manner and at the same times as would have been the case if such
deposit and defeasance had not occurred (and, in the case of legal defeasance
only, such Opinion of Counsel must be based on a ruling of the Internal Revenue
Service or other change in applicable Federal income tax law).
CONCERNING THE TRUSTEE
United States Trust Company of New York is to be the Trustee under the
Indenture and has been appointed by the Company as Registrar and Paying Agent
with regard to the Notes.
The Holders of a majority in principal amount at maturity of the
outstanding Notes will have the right to direct the time, method and place of
conducting any proceeding for exercising any remedy available to the Trustee,
subject to certain exceptions. The Indenture provides that if an Event of
Default occurs (and is not cured), the Trustee will be required, in the exercise
of its power, to use the degree of care of a prudent man in the conduct of his
own affairs. Subject to such provisions, the Trustee will be under no obligation
to exercise any of its rights or powers under the Indenture at the request of
any Holder of Notes, unless such Holder shall have offered to the Trustee
security and indemnity reasonably satisfactory to it against any loss, liability
or expense and then only to the extent required by the terms of the Indenture.
GOVERNING LAW
The Indenture provides that it and the Notes will be governed by, and
construed in accordance with, the laws of the State of New York without giving
effect to applicable principles of conflicts of law to the extent that the
application of the law of another jurisdiction would be required thereby.
CERTAIN DEFINITIONS
"Accreted Value" means, as of any date (the "Specified Date"), the
amount provided below for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates
(each, a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<PAGE> 76
68
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
<S> <C>
August 1, 1997................. $ 725.61
February 1, 1998............... 773.68
August 1, 1998................. 824.94
February 1, 1999............... 879.59
August 1, 1999................. 937.87
February 1, 2000............... 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal the sum of (a) the original
issue price of a Unit and (b) an amount equal to the product of (1) the
Accreted Value for the first Semi-Annual Accrual Date less such
original issue price multiplied by (2) a fraction, the numerator of
which is the number of days from the Issue Date to the Specified Date,
using a 360-day year of 12 30-day months, and the denominator of which
is the number of days elapsed from the Issue Date to the first
Semi-Annual Accrual Date, using a 360-day year of 12 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (a) the
Accreted Value for the Semi-Annual Accrual Date immediately preceding
such Specified Date and (b) an amount equal to the product of (1) the
Accreted Value for the immediately following Semi-Annual Accrual Date
less the Accreted Value for the immediately preceding Semi-Annual
Accrual Date multiplied by (2) a fraction, the numerator of which is
the number of days from the immediately preceding Semi-Annual Accrual
Date to the Specified Date, using a 360-day year of 12 30-day months,
and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"Additional Assets" means (i) any property or assets (other than
Indebtedness and Capital Stock) in a Related Business; (ii) the Capital Stock of
a Person that becomes a Restricted Subsidiary as a result of the acquisition of
such Capital Stock by the Company or another Restricted Subsidiary or (iii)
Capital Stock constituting a minority interest in any Person that at such time
is a Restricted Subsidiary; provided, however, that any such Restricted
Subsidiary described in clauses (ii) or (iii) above is primarily engaged in a
Related Business.
"Affiliate" of any specified Person means any other Person, directly or
indirectly, controlling or controlled by or under direct or indirect common
control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise; and the terms
"controlling" and "controlled" have meanings correlative to the foregoing;
provided, however, that the CDA shall not be deemed to be an Affiliate of the
Company and its Subsidiaries. For purposes of the provisions described under "
- -- Certain Covenants -- Limitation on Restricted Payments", " -- Certain
Covenants -- Limitation on Affiliate Transactions" and " -- Certain Covenants --
Limitations on Sales of Assets and Subsidiary Stock" only, "Affiliate" shall
also mean any beneficial owner of Capital Stock representing 5% or more of the
total voting power of the Voting Stock (on a fully diluted basis) of the Company
or of rights or warrants to purchase such Capital Stock (whether or not
currently exercisable) and any Person who would be an Affiliate of any such
beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary
(other than, in the case of (i), (ii) and (iii) above, (A) sales or other
dispositions of inventory, receivables and other assets in the ordinary course
of business, (B) a disposition by a
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69
Restricted Subsidiary to the Company or by the Company or a Restricted
Subsidiary to a Wholly Owned Subsidiary, (C) for purposes of the covenant
described under " -- Certain Covenants -- Limitation on Sales of Assets and
Subsidiary Stock" only, a disposition that constitutes a Restricted Payment
permitted by the covenant described under " -- Certain Covenants -- Limitation
on Restricted Payments", (D) a disposition of assets with a fair market value of
less than $100,000, (E) sales of the Company's ESL systems to customers and
leases, rentals or otherwise furnishing the use of such systems to customers and
(F) licenses or leases of any technology, know-how, patents, processes,
procedures, copyrights or other intellectual property, and related escrow
arrangements, for consideration equal to the fair market value thereof, as
determined in good faith by the Board of Directors (and whether or not such
consideration has been specifically allocated to such license or lease).
"Attributable Debt" in respect of a Sale/Leaseback Transaction means,
as at the time of determination, the present value (discounted at the interest
rate borne by the Notes, compounded annually) of the total obligations of the
lessee for rental payments during the remaining term of the lease included in
such Sale/Leaseback Transaction (including any period for which such lease has
been extended).
"Average Life" means, as of the date of determination, with respect to
any Indebtedness or Preferred Stock, the quotient obtained by dividing (i) the
sum of the products of numbers of years from the date of determination to the
dates of each successive scheduled principal payment of such Indebtedness or
redemption or similar payment with respect to such Preferred Stock multiplied by
the amount of such payment by (ii) the sum of all such payments.
"Board of Directors" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is required to be
classified and accounted for as a capital lease for financial reporting purposes
in accordance with GAAP, and the amount of Indebtedness represented by such
obligation shall be the capitalized amount of such obligation determined in
accordance with GAAP; and the Stated Maturity thereof shall be the date of the
last payment of rent or any other amount due under such lease prior to the first
date upon which such lease may be terminated by the lessee without payment of a
penalty.
"Capital Stock" of any Person means any and all shares, interests,
rights to purchase, warrants, options, participations or other equivalents of or
interests in (however designated) equity of such Person, including any Preferred
Stock, but excluding any debt securities convertible into such equity.
"CDA" means the Connecticut Development Authority.
"CDA Note" means the Company's 7.4% Convertible Note (dated August 12,
1994) in the aggregate principal amount of $5.0 million issued to the CDA.
"Code" means the Internal Revenue Code of 1986, as amended.
"Consolidated Interest Expense" means, for any period, the total
interest expense of the Company and its consolidated Restricted Subsidiaries,
plus, to the extent not included in such total interest expense, and to the
extent incurred by the Company or its Restricted Subsidiaries, without
duplication, (i) interest expense attributable to capital leases and the
interest expense attributable to leases constituting part of a Sale/Leaseback
Transaction, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed with respect to letters of credit and
bankers' acceptance financing, (vi) net costs associated with Hedging
Obligations (including amortization of fees), (vii) Preferred Stock dividends in
respect of all Preferred Stock held by Persons other than the Company or a
Wholly Owned Subsidiary, (viii) interest incurred in connection with Investments
in discontinued operations, (ix) interest accruing on any Indebtedness of any
other Person to the extent such Indebtedness is Guaranteed by (or secured by the
assets of) the Company or any Restricted Subsidiary and (x) the cash
contributions to any employee stock ownership plan or
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similar trust to the extent such contributions are used by such plan or trust to
pay interest or fees to any Person (other than the Company) in connection with
Indebtedness Incurred by such plan or trust.
"Consolidated Leverage Ratio" as of any date of determination means the
ratio of (i) the aggregate amount of Indebtedness of the Company and its
Restricted Subsidiaries as of the date of determination after giving effect to
any Indebtedness to be Incurred or discharged on the date of determination to
(ii) the aggregate amount of EBITDA for the four most recent fiscal quarters
ending at least 45 days prior to the date of determination (such four fiscal
quarters being herein called the "Reference Period"); provided, however, that
(1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness
since the beginning of the Reference Period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated Leverage Ratio
is an Incurrence of Indebtedness, or both, EBITDA for the Reference Period shall
be calculated after giving effect on a pro forma basis to such Indebtedness as
if such Indebtedness had been Incurred on the first day of the Reference Period,
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of the
Reference Period or if any Indebtedness is to be repaid, repurchased, defeased
or otherwise discharged (in each case other than Indebtedness Incurred under any
revolving credit facility unless such Indebtedness has been permanently repaid
and has not been replaced) on the date of the transaction giving rise to the
need to calculate the Consolidated Leverage Ratio, EBITDA for the Reference
Period shall be calculated on a pro forma basis as if such discharge had
occurred on the first day of the Reference Period and as if the Company or such
Restricted Subsidiary had not earned the interest income actually earned during
the Reference Period in respect of cash or Temporary Cash Investments used to
repay, repurchase, defease or otherwise discharge such Indebtedness, (3) if
since the beginning of the Reference Period the Company or any Restricted
Subsidiary shall have made any Asset Disposition, the EBITDA for the Reference
Period shall be reduced by an amount equal to the EBITDA (if positive) directly
attributable to the assets which are the subject of such Asset Disposition for
the Reference Period, or increased by an amount equal to the EBITDA (if
negative), directly attributable thereto for the Reference Period and
Consolidated Interest Expense for the Reference Period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for the
Reference Period (or, if the Capital Stock of any Restricted Subsidiary is sold,
the Consolidated Interest Expense for the Reference Period directly attributable
to the Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (4) if since the beginning of the Reference
Period the Company or any Restricted Subsidiary (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary (or any person which
becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA for the Reference Period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of the Reference Period and (5) if since the beginning of the Reference Period
any Person (that subsequently became a Restricted Subsidiary or was merged with
or into the Company or any Restricted Subsidiary since the beginning of the
Reference Period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(3) or (4) above if made by the Company or a Restricted Subsidiary during the
Reference Period, EBITDA for the Reference Period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of the Reference Period. For purposes of
this definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings relating thereto and the amount of
Consolidated Interest Expense associated with any Indebtedness Incurred in
connection therewith, the pro forma calculations shall be determined in good
faith by a responsible financial or accounting officer of the Company. If any
Indebtedness bears a floating rate of interest and is being given pro forma
effect, the interest on such Indebtedness shall be calculated as if the rate in
effect on the date of determination had been the applicable rate for the entire
period (taking into account any Interest Rate Agreement applicable to such
Indebtedness if such Interest Rate Agreement has a remaining term in excess of
12 months). In making any calculation of the Consolidated Leverage Ratio for any
period commencing prior to the Issue Date, the Notes shall be deemed to have
been issued on the first day of such period.
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"Consolidated Net Income" means, for any period, the net income of the
Company and its consolidated Subsidiaries; provided, however, that there shall
not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Person for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company
or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to a
Restricted Subsidiary, to the limitations contained in clause (iii)
below) and (B) the Company's equity in a net loss of any such Person
for such period shall be included in determining such Consolidated Net
Income;
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net
Income;
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting
principles.
Notwithstanding the foregoing, for the purposes of the covenant
described under "Certain Covenants -- Limitation on Restricted Payments" only,
there shall be excluded from Consolidated Net Income any dividends, repayments
of loans or advances or other transfers of assets from Unrestricted Subsidiaries
to the Company or a Restricted Subsidiary to the extent such dividends,
repayments or transfers increase the amount of Restricted Payments permitted
under such covenant pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown on the
balance sheet of the Company and its consolidated Subsidiaries, determined on a
consolidated basis in accordance with GAAP, as of the end of the most recent
fiscal quarter of the Company ending at least 45 days prior to the taking of any
action for the purpose of which the determination is being made, as (i) the par
or stated value of all outstanding Capital Stock of the Company plus (ii)
paid-in capital or capital surplus relating to such Capital Stock plus (iii) any
retained earnings or earned surplus less (A) any accumulated deficit and (B) any
amounts attributable to Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign exchange
contract, currency swap agreement or other similar agreement to which such
Person is a party or a beneficiary which is designed to protect such Person
against fluctuations in currency values.
"Default" means any event which is, or after notice or passage of time
or both would be, an Event of Default.
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"Disqualified Stock" means, with respect to any Person, any Capital
Stock which by its terms (or by the terms of any security into which it is
convertible or for which it is exchangeable) or upon the happening of any event
(i) matures or is mandatorily redeemable pursuant to a sinking fund obligation
or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Notes; provided, however, that any Capital Stock that
would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the Notes
shall not constitute Disqualified Stock if the "asset sale" or "change of
control" provisions applicable to such Capital Stock are not more favorable to
the holders of such Capital Stock than the provisions described under " --
Certain Covenants -- Limitation on Sales of Assets and Subsidiary Stock" and "
- -- Change of Control".
"EBITDA" for any period means the sum of Consolidated Net Income, plus
Consolidated Interest Expense plus the following to the extent deducted in
calculating such Consolidated Net Income: (a) all income tax expense of the
Company and its consolidated Restricted Subsidiaries, (b) depreciation expense
of the Company and its consolidated Restricted Subsidiaries, (c) amortization
expense of the Company and its consolidated Restricted Subsidiaries (excluding
amortization expense attributable to a prepaid cash item that was paid in a
prior period) and (d) all other non-cash charges of the Company and its
consolidated Restricted Subsidiaries (excluding any such non-cash charge to the
extent that it represents an accrual of or reserve for cash expenditures in any
future period), in each case for such period. Notwithstanding the foregoing, the
provision for taxes based on the income or profits of, and the depreciation and
amortization and non-cash charges of, a Restricted Subsidiary shall be added to
Consolidated Net Income to compute EBITDA only to the extent (and in the same
proportion) that the net income of such Restricted Subsidiary was included in
calculating Consolidated Net Income and only if a corresponding amount would be
permitted at the date of determination to be dividended to the Company by such
Restricted Subsidiary without prior approval (that has not been obtained),
pursuant to the terms of its charter and all agreements, instruments, judgments,
decrees, orders, statutes, rules and governmental regulations applicable to such
Restricted Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as amended.
"Foreign Subsidiary" means each Restricted Subsidiary not created or
organized in the United States or any state thereof and that conducts
substantially all of its operations outside of the United States.
"GAAP" means generally accepted accounting principles in the United
States of America as in effect as of the Issue Date, including those set forth
in (i) the opinions and pronouncements of the Accounting Principles Board of the
American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC.
"Guarantee" means any obligation, contingent or otherwise, of any
Person directly or indirectly guaranteeing any Indebtedness of any Person and
any obligation, direct or indirect, contingent or otherwise, of such Person (i)
to purchase or pay (or advance or supply funds for the purchase or payment of)
such Indebtedness or other obligation of such Person (whether arising by virtue
of partnership arrangements, or by agreements to keep-well, to purchase assets,
goods, securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
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"Hedging Obligations" of any Person means the obligations of such
Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Noteholder" means the Person in whose name a Note is
registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise become
liable for; provided, however, that any Indebtedness or Capital Stock of a
Person existing at the time such Person becomes a Subsidiary (whether by merger,
consolidation, acquisition or otherwise) shall be deemed to be Incurred by such
Subsidiary at the time it becomes a Subsidiary. The term "Incurrence" when used
as a noun shall have a correlative meaning. The accretion of principal of a
non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date of
determination (without duplication),
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all conditional sale obligations
of such Person and all obligations of such Person under any title
retention agreement (but excluding trade accounts payable arising in
the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in (i)
through (iii) above) entered into in the ordinary course of business of
such Person to the extent such letters of credit are not drawn upon or,
if and to the extent drawn upon, such drawing is reimbursed no later
than the tenth Business Day following payment on the letter of credit);
(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the fair market value of such property or assets and the amount of the
obligation so secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
"Interest Rate Agreement" means in respect of a Person any interest
rate swap agreement, interest rate cap agreement or other financial agreement or
arrangement designed to protect such Person against fluctuations in interest
rates.
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"Investment" in any Person means any direct or indirect advance, loan
(other than advances to customers in the ordinary course of business that are
recorded as accounts receivable on the balance sheet of the lender) or other
extensions of credit (including by way of Guarantee or similar arrangement) or
capital contribution to (by means of any transfer of cash or other property to
others or any payment for property or services for the account or use of
others), or any purchase or acquisition of Capital Stock, Indebtedness or other
similar instruments issued by such Person. For purposes of the definition of
"Unrestricted Subsidiary", the definition of "Restricted Payment" and the
covenant described under " -- Certain Covenants -- Limitation on Restricted
Payments", (i) "Investment" shall include the portion (proportionate to the
Company's equity interest in such Subsidiary) of the fair market value of the
net assets of any Subsidiary of the Company at the time that such Subsidiary is
designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
For purposes of the definitions of "Joint Venture", "Restricted Payment" and
"Permitted Investment" and the covenant described under " -- Certain Covenants
- -- Limitation on Restricted Payments", (a) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Person) of the
fair market value of the net assets of any Person at the time that such Person
is designated a Joint Venture and (b) any property transferred to or from a
Joint Venture shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
"Issue Date" means the date on which the Old Notes are originally
issued.
"Joint Venture" means a Person (i) engaged in technology development,
manufacturing or distribution in a Related Business, (ii) designated by the
Company as a "Joint Venture Company" for purposes of the Indenture; provided,
however, that such designation would be permitted under the covenant described
under " -- Certain Covenants -- Limitation on Restricted Payments", and (iii) as
to which the Company and the Restricted Subsidiaries own at least 10% of the
Voting Stock, such joint venture to be deemed to include such Subsidiary of such
Person.
"Lien" means any mortgage, pledge, security interest, encumbrance, lien
or charge of any kind (including any conditional sale or other title retention
agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash payments
received therefrom (including any cash payments received by way of deferred
payment of principal pursuant to a note or installment receivable or otherwise
and proceeds from the sale or other disposition of any securities received as
consideration, but only as and when received, but excluding any other
consideration received in the form of assumption by the acquiring Person of
Indebtedness or other obligations relating to such properties or assets or
received in any other noncash form) in each case net of (i) all legal, title and
recording tax expenses, commissions and other fees and expenses incurred, and
all Federal, state, provincial, foreign and local taxes required to be accrued
as a liability under GAAP, as a consequence of such Asset Disposition, (ii) all
payments made on any Indebtedness which is secured by any assets subject to such
Asset Disposition, in accordance with the terms of any Lien upon or other
security agreement of any kind with respect to such assets, or which must by its
terms, or in order to obtain a necessary consent to such Asset Disposition, or
by applicable law be, repaid out of the proceeds from such Asset Disposition,
(iii) all distributions and other payments required to be made to minority
interest holders in Subsidiaries or joint ventures as a result of such Asset
Disposition and (iv) the deduction of appropriate amounts provided by the seller
as a reserve, in accordance with GAAP, against any liabilities associated with
the property or other assets disposed in such Asset Disposition and retained by
the Company or any Restricted Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of Capital
Stock, means the cash proceeds of such issuance or sale net of attorneys' fees,
accountants' fees, underwriters' or placement agents' fees, discounts or
commissions and brokerage, consultant and other fees actually incurred in
connection with such issuance or sale and net of taxes paid or payable as a
result thereof.
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"Permitted Holders" means (i) Norton Garfinkle, Bruce F. Failing, Jr.,
their respective spouses, issue or any spouse of their issue, (ii) any Person
controlled directly or indirectly by any one or more of the Persons referred to
in clause (i), (iii) any trust, all of the beneficiaries of which are any one or
more of the persons referred to in clause (i), or (iv) any bona fide legal
representative of any of the individuals in clause (i) duly appointed as a
result of the death or legal incapacity of such individual.
"Permitted Investment" means an Investment by the Company or any
Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a Person
that will, upon the making of such Investment, become a Restricted Subsidiary;
provided, however, that the primary business of any such Restricted Subsidiary
is a Related Business; (ii) another Person if as a result of such Investment
such other Person is merged or consolidated with or into, or transfers or
conveys all or substantially all its assets to, the Company or a Restricted
Subsidiary; provided, however, that such Person's primary business is a Related
Business; (iii) Temporary Cash Investments; (iv) receivables owing to the
Company or any Restricted Subsidiary if created or acquired in the ordinary
course of business and payable or dischargeable in accordance with customary
trade terms; provided, however, that such trade terms may include such
concessionary trade terms as the Company or any such Restricted Subsidiary deems
reasonable under the circumstances; (v) commission, payroll, travel and similar
advances to cover matters that are expected at the time of such advances
ultimately to be treated as expenses for accounting purposes and that are made
in the ordinary course of business; (vi) loans or advances to employees made in
the ordinary course of business; (vii) a Person arising as a result of any
Hedging Obligations; (viii) stock, obligations or securities received in
settlement of debts created in the ordinary course of business and owing to the
Company or any Restricted Subsidiary or in satisfaction of judgments; and (ix)
any Person to the extent such Investment represents the non-cash portion of the
consideration received for an Asset Disposition as permitted pursuant to the
covenant described under " -- Certain Covenants -- Limitation on Sales of Assets
and Subsidiary Stock".
"Permitted Liens" means, with respect to any Person, (a) pledges or
deposits by such Person under worker's compensation laws, unemployment insurance
laws or similar legislation, or good faith deposits in connection with bids,
tenders, contracts (other than for the payment of Indebtedness) or leases to
which such Person is a party, or deposits to secure public or statutory
obligations of such Person or deposits of cash or United States government bonds
to secure surety or appeal bonds to which such Person is a party, or deposits as
security for contested taxes or import duties or for the payment of rent, in
each case Incurred in the ordinary course of business; (b) Liens imposed by law,
such as carriers', warehousemen's and mechanics' Liens, in each case for sums
not yet due or being contested in good faith by appropriate proceedings or other
Liens arising out of judgments or awards against such Person with respect to
which such Person shall then be proceeding with an appeal or other proceedings
for review; (c) Liens for property taxes not yet subject to penalties for
non-payment or which are being contested in good faith and by appropriate
proceedings; (d) Liens in favor of issuers of surety bonds or letters of credit
issued pursuant to the request of and for the account of such Person in the
ordinary course of its business; provided, however, that such letters of credit
do not constitute Indebtedness; (e) minor survey exceptions, encumbrances,
easements or reservations of, or rights of others for, licenses, rights of way,
sewers, electric lines, telegraph and telephone lines and other similar
purposes, or zoning or other restrictions as to the use of real property or
Liens incidental to the conduct of the business of such Person or to the
ownership of its properties which were not Incurred in connection with
Indebtedness and which do not in the aggregate materially impair their use in
the operation of the business of such Person; (f) Liens securing Indebtedness
Incurred to finance the construction, purchase or lease of, or repairs,
improvements or additions to, property of such Person; provided, however, that
the Lien may not extend to any other property owned by such Person or any of its
Subsidiaries at the time the Lien is Incurred, and the Indebtedness (other than
any interest thereon) secured by the Lien may not be Incurred more than 180 days
after the later of the acquisition, completion of construction, repair,
improvement, addition or commencement of full operation of the property subject
to the Lien; (g) Liens to secure Indebtedness permitted under the provisions
described in clause (b)(1) under " -- Certain Covenants -- Limitation on
Indebtedness", but only to the extent secured by inventory or accounts
receivables and related assets; (h) Liens existing on the Issue Date; (i) Liens
on property or shares of Capital Stock of another Person at the time such other
Person becomes a Subsidiary of such Person; provided, however, that such Liens
are not created, incurred or assumed in connection with, or in contemplation of,
such other Person becoming such a Subsidiary; provided further, however, that
such Lien may not extend to any other property owned by such Person or any of
its Subsidiaries; (j) Liens on property at the time such Person or any of its
Subsidiaries acquires the property, including any acquisition by means of a
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merger or consolidation with or into such Person or a Subsidiary of such Person;
provided, however, that such Liens are not created, incurred or assumed in
connection with, or in contemplation of, such acquisition; provided further,
however, that the Liens may not extend to any other property owned by such
Person or any of its Subsidiaries; (k) Liens securing Indebtedness or other
obligations of a Subsidiary of such Person owing to such Person or a wholly
owned Subsidiary of such Person; (l) Liens securing Hedging Obligations so long
as such Hedging Obligations relate to Indebtedness that is, and is permitted to
be under the Indenture, secured by a Lien on the same property securing such
Hedging Obligations; (m) Liens to secure any Refinancing (or successive
Refinancings) as a whole, or in part, of any Indebtedness secured by any Lien
referred to in the foregoing clauses (f), (g), (h), (i) and (j); provided,
however, that (x) such new Lien shall be limited to all or part of the same
property that secured the original Lien (plus improvements to or on such
property) and (y) the Indebtedness secured by such Lien at such time is not
increased to any amount greater than the sum of (A) the outstanding principal
amount or, if greater, committed amount of the Indebtedness described under
clauses (f), (g), (h), (i) or (j) at the time the original Lien became a
Permitted Lien and (B) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension, renewal
or replacement; (n) Liens in favor of the Company or any Wholly-Owned Subsidiary
or Subsidiary Guarantor; (o) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (p) Liens associated with leases and subleases
of real property that do not materially interfere with the ordinary conduct of
the business of the Company and any of its Restricted Subsidiaries and that are
made on customary and usual terms applicable to similar properties; and (q)
Liens consisting of licenses or leases of Property and related escrow
arrangements; provided, however, that such Liens shall not (except as described
under clause (h)) secure any Indebtedness of the Company or any Restricted
Subsidiary. Notwithstanding the foregoing, "Permitted Liens" will not include
any Lien described in clauses (f), (i) or (j) above to the extent such Lien
applies to any Additional Assets acquired directly or indirectly from Net
Available Cash pursuant to the covenant described under " -- Certain Covenants
- -- Limitation on Sale of Assets and Subsidiary Stock" unless the assets that
were the subject of the Asset Disposition giving rise to such Net Available Cash
were subject to Liens securing Indebtedness, in which event such Permitted Liens
may secure obligations in an amount not to exceed the amount of such
Indebtedness. For purposes of this definition, "Indebtedness" shall be deemed to
include interest on such Indebtedness.
"Person" means any individual, corporation, partnership, limited
liability company, joint venture, association, joint-stock company, trust,
unincorporated organization, government or any agency or political subdivision
thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any Person, means
Capital Stock of any class or classes (however designated) which is preferred as
to the payment of dividends or distributions, or as to the distribution of
assets upon any voluntary or involuntary liquidation or dissolution of such
Person, over shares of Capital Stock of any other class of such Person.
"principal" of a Note means the principal of the Note plus the premium,
if any, payable on the Note which is due or overdue or is to become due at the
relevant time.
"Property" of any Person means all types of real, personal, tangible or
mixed property owned by such Person whether or not included in the most recent
consolidated balance sheet of such Person under GAAP.
"Refinance" means, in respect of any Indebtedness or Preferred Stock,
to refinance, extend, renew, refund, repay, prepay, redeem, defease or retire,
or to issue other Indebtedness or Preferred Stock in exchange or replacement
for, such Indebtedness or Preferred Stock. "Refinanced" and "Refinancing" shall
have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances any
Indebtedness of the Company or any Restricted Subsidiary existing on the Issue
Date or Incurred in compliance with the Indenture, including Indebtedness that
Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has
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an aggregate principal amount (or if Incurred with original issue discount, an
aggregate issue price) that is equal to or less than the aggregate principal
amount (or if Incurred with original issue discount, the aggregate accreted
value) then outstanding or committed (plus fees and expenses, including any
premium and defeasance costs) under the Indebtedness being Refinanced; provided
further, however, that Refinancing Indebtedness shall not include (x)
Indebtedness of a Subsidiary that Refinances Indebtedness of the Company or (y)
Indebtedness of the Company or a Restricted Subsidiary that Refinances
Indebtedness of an Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date and any business utilizing any technology, know-how, patents,
processes, procedures, copyrights or other intellectual property now or
hereinafter developed by the Company or any Restricted Subsidiary.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company that is not
an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to property
now owned or hereafter acquired whereby the Company or a Restricted Subsidiary
transfers such property to a Person and the Company or a Restricted Subsidiary
leases it from such Person.
"SEC" means the Securities and Exchange Commission.
"Senior Indebtedness" means (i) Indebtedness of the Company, whether
outstanding on the Issue Date or thereafter Incurred, and (ii) accrued and
unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company to the
extent post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
the Company is responsible or liable unless, in the case of (i) and (ii), in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding, it is provided that such obligations are subordinate in right of
payment to the Notes; provided, however, that Senior Indebtedness shall not
include (1) any obligation of the Company to any Subsidiary, (2) any liability
for Federal, state, local or other taxes owed or owing by the Company, (3) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of the Company (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect to
any other Indebtedness or other obligation of the Company or (5) that portion of
any Indebtedness which at the time of Incurrence is Incurred in violation of the
Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that would be
a "Significant Subsidiary" of the Company within the meaning of Rule 1-02 under
Regulation S-X promulgated by the SEC.
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"Stated Maturity" means, with respect to any security, the date
specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency unless such contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the Company
(whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right of payment to the Notes pursuant to a written
agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Subsidiary Guarantor" means any Subsidiary which, pursuant to the
terms of the Indenture, has executed a Subsidiary Guaranty.
"Subsidiary Guaranty" means the Guarantee by a Subsidiary Guarantor of
the Company's obligations with respect to the Notes. The form of such Guarantee
is provided for in the Indenture. Each Subsidiary Guaranty will be limited in
amount to an amount not to exceed the maximum amount that can be guaranteed by
the applicable Subsidiary Guarantor without rendering the Subsidiary Guaranty,
as it relates to such Subsidiary Guarantor, voidable under applicable law
relating to fraudulent conveyance or fraudulent transfer or similar laws
affecting the rights of creditors generally. Upon the sale or other disposition
of a Subsidiary Guarantor or the sale or disposition of all or substantially all
the assets of a Subsidiary Guarantor (in each case other than to the Company or
an Affiliate of the Company) permitted by the Indenture, such Subsidiary
Guarantor will be released and relieved from all its obligations under its
Subsidiary Guaranty.
"Temporary Cash Investments" means any of the following:
(i) any investment in direct obligations of the United States
of America or any agency thereof or obligations guaranteed by the
United States of America or any agency thereof,
(ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date
of acquisition thereof issued by a bank or trust company which is
organized under the laws of the United States of America, any state
thereof or any foreign country recognized by the United States, and
which bank or trust company has capital, surplus and undivided profits
aggregating in excess of $50,000,000 (or the foreign currency
equivalent thereof) and has outstanding debt which is rated "A" (or
such similar equivalent rating) or higher by at least one nationally
recognized statistical rating organization (as defined in Rule 436
under the Securities Act) or any money-market fund sponsored by a
registered broker dealer or mutual fund distributor,
(iii) repurchase obligations with a term of not more than 30
days for underlying securities of the types described in clause (i)
above entered into with a bank meeting the qualifications described in
clause (ii) above,
(iv) investments in commercial paper, maturing not more than
90 days after the date of acquisition, issued by a corporation (other
than an Affiliate of the Company) organized and in existence under the
laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which
any investment therein is made of "P-1" (or higher) according to
Moody's Investors Service, Inc. or "A-1" (or higher) according to
Standard and Poor's Ratings Group, and
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(v) investments in securities with maturities of 90 days or
less from the date of acquisition issued or fully guaranteed by any
state, commonwealth or territory of the United States of America, or by
any political subdivision or taxing authority thereof, and rated at
least "A" by Standard & Poor's Ratings Group or "A" by Moody's
Investors Service, Inc.;
provided, however, that in the case of the net proceeds from the sale of the
Units, the time periods set forth in (ii), (iii), (iv) and (v) shall be two
years.
"Units" means the Units sold by the Company consisting of the Notes and
certain Warrants to purchase Common Stock.
"Unrestricted Subsidiary" means (i) any Subsidiary of the Company that
at the time of determination shall be designated an Unrestricted Subsidiary by
the Board of Directors in the manner provided below and (ii) any Subsidiary of
an Unrestricted Subsidiary. The Board of Directors may designate any Subsidiary
of the Company (including any newly acquired or newly formed Subsidiary) to be
an Unrestricted Subsidiary unless such Subsidiary or any of its Subsidiaries
owns any Capital Stock or Indebtedness of, or holds any Lien on any property of,
the Company or any other Subsidiary of the Company that is not a Subsidiary of
the Subsidiary to be so designated; provided, however, that either (A) the
Subsidiary to be so designated has total assets of $1,000 or less or (B) if such
Subsidiary has assets greater than $1,000, such designation would be permitted
under the covenant described under " -- Certain Covenants -- Limitation on
Restricted Payments". The Board of Directors may designate any Unrestricted
Subsidiary to be a Restricted Subsidiary; provided, however, that immediately
after giving effect to such designation (x) the Company could Incur $1.00 of
additional Indebtedness under paragraph (a) of the covenant described under " --
Certain Covenants -- Limitation on Indebtedness" and (y) no Default shall have
occurred and be continuing. Any such designation by the Board of Directors shall
be made by the Company to the Trustee by promptly filing with the Trustee a copy
of the board resolution giving effect to such designation and an Officers'
Certificate certifying that such designation complied with the foregoing
provisions.
"U.S. Government Obligations" means direct obligations (or certificates
representing an ownership interest in such obligations) of the United States of
America (including any agency or instrumentality thereof) for the payment of
which the full faith and credit of the United States of America is pledged and
which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock or other
interests (including partnership interests) of such Person then outstanding and
normally entitled (without regard to the occurrence of any contingency) to vote
in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all the Capital
Stock of which (other than directors' qualifying shares) is owned by the Company
or one or more Wholly Owned Subsidiaries.
CERTAIN FEDERAL INCOME TAX CONSEQUENCES
The following is a general discussion of certain U.S. federal income
tax considerations applicable to the exchange of the Old Notes for New Notes
pursuant to the Exchange Offer, and to the ownership and disposition of the New
Notes. This summary is based upon provisions of the Internal Revenue Code of
1986, as amended (the "Code"), regulations, rulings and decisions currently in
effect, all of which are subject to change (possibly with retroactive effect).
The discussion does not purport to deal with all aspects of federal taxation
that may be relevant to particular investors in light of their personal
investment circumstances (for example, to persons holding Notes as part of a
conversion transaction or as part of a hedge or hedging transaction, or as a
position in a straddle for tax purposes), nor does it discuss federal income tax
considerations applicable to certain types of investors subject to special
treatment under the federal income tax laws (for example, life insurance
companies, tax-exempt organizations and financial institutions). In addition,
the discussion does not consider the effect of any foreign, state, local, gift,
estate or other tax laws that may be applicable to a particular investor. The
discussion assumes that
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investors hold the Notes as capital assets within the meaning of Section 1221 of
the Code. Each holder is strongly urged to consult his, her or its tax advisor
regarding the particular tax consequences to such holder of exchanging the Old
Notes for the New Notes, and of the ownership and disposition of the New Notes.
EXCHANGE
The exchange of the Old Notes for the New Notes pursuant to the
Exchange Offer should not be treated as a taxable transaction for federal income
tax purposes because the New Notes do not differ materially in kind or extent
from the Old Notes. Accordingly, no gain or loss should be recognized by a
holder who exchanges an Old Note for a New Note pursuant to the Exchange Offer,
and each New Note should be viewed as a continuation of the corresponding Old
Note. For purposes of determining gain or loss upon a subsequent sale or
exchange of the New Notes, a holder's initial basis in the New Notes will be the
same as such holder's adjusted basis in the Old Notes exchanged therefor, and
the holding period of a holder in the New Note should include the period during
which such holder held such corresponding Old Note.
INITIAL TAX BASIS
The Old Notes were issued in the Private Placement as part of an
investment unit that included the Old Notes and Warrants to acquire Common
Stock. Consequently, a purchaser of a Unit was required to allocate the purchase
price of the Unit between the Old Note and the Warrants based on their relative
fair market values at the time of purchase. For purposes of determining original
issue discount on the Notes, the Company allocated the issue price of the Units
between the Notes and Warrants based on valuation advice furnished to it by the
initial purchasers of the Units, as described below under "Tax Treatment of
Notes -- Interest and Original Issue Discount".
TAX TREATMENT OF NOTES
STATUS AS DEBT
The Company intends to treat the Notes as indebtedness and not as
equity for federal income tax purposes, and the federal income tax consequences
described below are based on that characterization. Such treatment, however, is
not binding on the Internal Revenue Service (or the courts), and there can be no
assurance that the Internal Revenue Service would not argue (or that a court
would not hold) that all or some portion of the Notes should be treated as
equity for federal income tax purposes. Among other consequences, treatment as
equity would result in all or some portion of the interest payments and/or
original issue discount on the Notes being treated as distributions with respect
to stock which would not be deductible by the Company.
INTEREST AND ORIGINAL ISSUE DISCOUNT
The Old Notes were issued with original issue discount for federal
income tax purposes. Because the New Notes are treated as a continuation of the
Old Notes, the original issue discount on the Old Notes will carry over to the
New Notes, and continue to be treated in the same manner. In general, original
issue discount on the Notes, defined as the excess of "stated redemption price
at maturity" over "issue price," must be included in the holder's gross taxable
income in advance of the receipt of cash representing that income, and such
amounts will increase periodically over the life of the Notes.
Under the Treasury Regulations, the issue price of the Units under the
Private Placement was the first price at which a substantial amount of the Units
were sold for money (ignoring for this purpose sales to the Initial Purchasers
of such Units under the Private Placement). The issue price for a Unit as so
determined was allocated between the debt instrument (i.e., the Old Note) and
the property rights (i.e., the Warrants) that comprised the Unit based on their
relative fair market values at the time of issuance. Pursuant to these rules,
and based on advice furnished to it by the Initial Purchasers, the Company
treated each Old Note as having an issue price of $644.21and each Warrant as
being issued for $34.62. This allocation, however, is not binding on the
Internal Revenue Service, and there can be no assurance that the Internal
Revenue Service will not challenge the Company's determination of the issue
price of the Old Notes.
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The Company's allocation is binding on each holder unless the holder
discloses that his or her allocation differs from the Company's allocation on a
statement attached to the holder's timely filed federal income tax return for
the year in which he, she or it acquires the investment unit. If a holder uses
an allocation different from the Company, or a holder acquired a Unit at a price
different than that on which the Company's allocation is based, the holder will
be treated as having acquired the Note for a greater or lesser amount than the
Note's issue price, resulting in "acquisition premium" or "market discount" as
defined below. Holders intending to use an issue price allocation different from
that used by the Company should consult their tax advisors as to the
consequences to them of their particular allocation.
Under the Treasury Regulations, a debt instrument's stated redemption
price at maturity is the sum of all payments provided by the instrument other
than payments of "qualified stated interest," which is defined as stated
interest that is unconditionally payable at least annually at a single fixed
rate. The Company believes that no part of the stated interest on the Notes will
be qualified stated interest, and therefore that the stated redemption price at
maturity of the Notes will equal their principal amount at maturity plus all
stated interest. Thus, each Note will bear original issue discount in an amount
equal to the excess of (i) the sum of its principal amount at maturity plus all
stated interest payments over (ii) its issue price.
A holder generally will be required to include in gross income the
original issue discount attributable to the Notes over their term and before
receipt of the cash attributable to such income under a method embodying an
economic accrual of such discount and calculated on the basis of a constant
yield to maturity. In determining the yield and maturity of a debt instrument
which contains a call option, such as the Notes, the Company will be deemed to
exercise the call option in a manner that minimizes the yield on the debt
instrument. If the Note is not in fact called on the presumed exercise date,
then, for purposes of the accrual of original issue discount, the yield and
maturity of the Note are redetermined by treating the Note as reissued on that
date for an amount equal to its adjusted issue price (generally the original
issue price increased by the aggregate amount of previously accrued original
issue discount less payments other than qualified stated interest) on that date.
A Registration Default, as described under "Description of the Notes --
Exchange Offer; Registration Rights", will cause additional interest to accrue
on the Notes in the manner described therein. In addition, a Change of Control
of the Company would require an additional amount to be paid on the Notes in the
event that a holder requires the Company to repurchase such holder's Notes, in
the manner described under "-- Change of Control". However, under the Treasury
Regulations, the possibility of any such additional interest or payment will not
affect the accrual of original issue discount or the yield to maturity on the
Notes unless, based on all the facts and circumstances as of the issue date, it
is more likely than not that such additional interest or payment will be paid.
The Company does not intend to treat the possibility of such additional interest
or payment as affecting the computation of original issue discount or yield to
maturity. If a holder of a Note becomes entitled to additional interest or
payments, then, for purposes of determining the accrual of original issue
discount, the yield to maturity of the Notes will be redetermined by treating
the Notes as reissued on the date that it is determined that such additional
interest or payments will be required to be paid, for an amount equal to its
adjusted issue price on such date.
If a holder acquires a Note for an amount less than the "revised issue
price" (generally the original issue price increased by the aggregate amount of
previously accrued original issue discount (without regard to any reductions
described in the following sentence) less payments other than qualified stated
interest), such holder may be subject to the market discount rules described
below. If a holder acquires a Note by purchase for an amount greater than its
revised issue price, such holder will be considered to have purchased such Note
with "acquisition premium", and the amount of original issue discount that such
purchaser must include in income with respect to such Note for any taxable year
will be reduced by the portion of acquisition premium properly allocable to such
year.
A holder may make an election to include in gross income all interest
that accrues on a Note (including original issue discount, market discount and
de minimis market discount, as adjusted by any amortizable bond premium) in
accordance with an economic yield method calculated by treating the Note as
being issued on the holder's acquisition date at an issue price equal to the
holder's adjusted basis in the Note immediately after its acquisition.
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APPLICABLE HIGH YIELD DISCOUNT OBLIGATION
The Notes constitute "applicable high yield discount obligations" under
the Code. As a result, the original issue discount that accrues with respect to
the Notes will not be deductible by the Company for federal income tax purposes
until paid. Moreover, since the yield to maturity of the Notes exceeds the
applicable federal rate (as set forth in Section 1274(d) of the Code) plus six
percentage points, a ratable portion of the Company's deduction for original
issue discount (the "Disqualified OID") will be permanently denied. In the case
of a corporate holder of a Note, the Disqualified OID will be treated, when
accrued, as a dividend to the extent of the Company's current or accumulated
earnings and profits for purposes of the dividends received deduction provisions
in the Code.
LIMITATION ON INTEREST DEDUCTION FOR CORPORATE ACQUISITION INDEBTEDNESS
Section 279 of the Code, and Treasury Regulations promulgated
thereunder, imposes limitations on the ability of a corporation to deduct
interest (including original issue discount) on "corporate acquisition
indebtedness". "Corporate acquisition indebtedness" is generally debt
obligations issued to provide direct or indirect consideration for the purchase
of stock or not less than two-thirds of all the operating assets of another
corporation, if certain other tests are satisfied. The maximum annual amount of
any interest deduction on corporate acquisition indebtedness is $5 million,
reduced generally by the amount of interest incurred on indebtedness issued to
acquire stock or assets which does not constitute corporate acquisition
indebtedness under the other tests. Under the Treasury Regulations, debt
obligations are issued to provide indirect consideration for an acquisition of
stock or assets for purposes of Section 279 if, inter alia, at the time of
issuance of the obligations the issuing corporation anticipated the acquisition
of such stock or assets and the obligations would not have been issued if the
issuing corporation had not so anticipated such acquisition.
As discussed in the Private Placement, the Company may use a portion of
the proceeds from the sale of the Units in connection with future acquisitions,
but the Company has no current agreement, arrangement or commitment pertaining
to any future acquisition. Based on the Treasury Regulations, the Company does
not believe that the Old Notes were issued to provide indirect consideration for
an acquisition of stock or assets within the meaning of Section 279. However
there can be no assurance that the Internal Revenue Service will agree with this
characterization. Should the Company make an acquisition of stock or assets of
another corporation (other than generally stock or assets of a foreign
corporation), it is possible that all or a portion of the Notes will be
considered by the Internal Revenue Service to constitute "corporate acquisition
indebtedness" for which interest deductions are limited under Section 279 of the
Code.
SALE OR REDEMPTION
A holder generally will recognize taxable gain or loss on the sale or
redemption of the Notes equal to the difference between the amount realized from
such sale or redemption and his or her adjusted tax basis for such Notes. Except
as discussed under " -- Market Discount," such gain or loss generally will be
capital gain or loss and will be long-term capital gain or loss if the holding
period for such Notes is more than one year. A holder's adjusted tax basis in a
Note is generally equal to the amount paid therefor, increased by accrued
original issue discount and market discount previously included in the holder's
gross income with respect to the Note, and decreased by (i) payments on the Note
other than payments of qualified stated interest and (ii) amortized bond premium
with respect to the Note (discussed below).
MARKET DISCOUNT
A holder who purchases a Note for an amount that is less than its
revised issue price will be subject to the market discount provisions of the
Code. Market discount is the excess, if any, of the Note's revised issue price
(defined above) over its basis in the hands of the acquirer immediately after
its acquisition. However, market discount will not be considered to exist if, at
the time of acquisition, the discount is less than 1/4 of 1% of the Note's
stated redemption price at maturity multiplied by the number of full years
remaining until maturity ("de minimis market discount").
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When a holder disposes of a Note acquired with market discount, the
lesser of the gain recognized or the accrued market discount will be taxable to
the holder as ordinary income (and will generally be treated as interest).
Accrued market discount at such time is the total market discount multiplied by
a fraction, the numerator of which is the number of days the acquirer held the
Note and the denominator of which is the number of days from the date the
acquirer acquired the Note until its maturity date. As an alternative to this
ratable method, the holder may elect to compute the accrued market discount
based upon an economic yield to maturity.
A holder of a market discount obligation is generally required, until
the holder disposes of the obligation in a taxable transaction, to defer a
portion of the deduction of interest expense on any indebtedness incurred or
maintained to purchase or carry the obligation in an amount equal to the lesser
of (i) the amount of such interest expense in excess of the amount of interest
(including original issue discount) includible in gross income with respect to
the obligation or (ii) the amount of market discount allocable to the number of
days in the taxable year the holder held the obligation.
The Notes may be redeemed in whole or in part before maturity at the
times and under the circumstances discussed above. If the Notes are redeemed in
part, a holder of Notes acquired with market discount could be required to treat
the principal payment as ordinary income to the extent of any accrued market
discount on such Notes.
A holder of a debt instrument acquired at a market discount may elect
to include the market discount in income as the discount accrues. The current
inclusion election, once made, applies to all market discount obligations
acquired on or after the first day of the taxable year to which the election
applies and may not be revoked without the consent of the Internal Revenue
Service. If a holder of Notes elects to include market discount in income as it
accrues, the above-described rules regarding ordinary income recognition on
dispositions and partial redemptions of such Notes and the deferral of interest
deductions on indebtedness related to such Notes would not apply.
BOND PREMIUM
A holder who acquires an obligation for an amount in excess of the
amount payable at maturity (or at an earlier call date, if a smaller premium
would result) may elect to amortize and deduct (on a constant yield basis) the
amount of such excess over the period from the acquisition date to the maturity
date, or to the earlier "call date", where appropriate, if a smaller deduction
would result, with corresponding reductions in such holder's tax basis in the
debt instrument. Amortizable bond premium is treated as an interest deduction,
except as may be provided in Treasury Regulations. An election to amortize bond
premium applies with respect to all bonds held on the first day of the taxable
year for which the election is made and to bonds thereafter acquired and may not
be revoked without the consent of the Internal Revenue Service.
INFORMATION REPORTING AND BACKUP WITHHOLDING
The Company will make annual reports to the Internal Revenue Service
and holders of the Notes regarding the amount of original issue discount and
Disqualified OID with respect to such Notes paid or accrued during the year, to
the extent required by law.
Under federal income tax law, a holder of Notes may, under certain
circumstances, be subject to "backup withholding" unless such holder (i) is a
corporation, or is otherwise exempt and, when required, demonstrates this fact
or (ii) provides a correct taxpayer identification number, certifies as to no
loss of exemption from backup withholding and otherwise complies with applicable
requirements of the backup withholding rules. The withholding rate is 31% of
"reportable payments," which include dividends, interest (including original
issue discount), proceeds from sale or redemption and, under certain
circumstances, principal payments.
CERTAIN FEDERAL INCOME TAX CONSIDERATIONS APPLICABLE TO FOREIGN HOLDERS
The following discussion summarizes certain United States federal
income tax consequences generally applicable to the ownership and disposition of
the Notes by a holder who is not a United States Person ("Non-U.S.
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Holder"). The term "United States Person" means a citizen or resident of the
United States, a corporation, partnership or other entity created or organized
in or under the laws of the United States or any state thereof or an estate or
trust, the income of which is subject to federal income taxation regardless of
its source. This discussion does not purport to deal with all aspects of United
States federal income taxation that may be relevant to a Non-U.S. Holder and
does not describe any tax consequences arising out of the laws of any state,
locality or foreign jurisdiction or out of United States federal estate and gift
tax laws. NON-U.S. HOLDERS ARE ADVISED TO CONSULT THEIR TAX ADVISORS REGARDING
THE UNITED STATES FEDERAL, STATE, LOCAL AND FOREIGN TAX CONSEQUENCES OF THE
EXCHANGE OF OLD NOTES FOR NEW NOTES AND OWNERSHIP AND DISPOSITION OF THE NEW
NOTES.
INTEREST AND ORIGINAL ISSUE DISCOUNT
Interest paid by the Company to a Non-U.S. Holder that is not
effectively connected with the conduct of a trade or business within the United
States by such foreign holder generally will not be subject to withholding of
United States federal income tax if (i) the Non-U.S. Holder does not actually or
constructively own 10% or more of the total voting power of all voting stock of
the Company and is not a controlled foreign corporation with respect to which
the Company is a "related person" within the meaning of the Code and (ii) the
beneficial owner, under penalty of perjury, certifies that the beneficial owner
is not a United States person and provides the beneficial owner's name and
address. A Non-U.S. Holder that does not qualify for exemption from withholding
under the preceding sentence generally will be subject to withholding of U.S.
federal income tax at the rate of 30% (or a lower applicable treaty rate) on
interest payments and payments attributable to original issue discount on the
Notes.
Interest paid by the Company to a Non-U.S. Holder that is effectively
connected with the conduct of a trade or business within the United States by
such foreign holder generally will be subject to the United States federal
income tax on net income that applies to United States persons generally (and,
with respect to corporate holders under certain circumstances, the branch
profits tax).
Original issue discount that accrues while a Note is held by a Non-U.S.
Holder is generally treated in the same manner as interest described above.
Withholding attributable to original issue discount, where required, is made at
the time interest on the Note is paid or, to the extent such original issue
discount was not previously taxed, at the time the Note is sold, exchanged or
redeemed.
GAIN ON DISPOSITION
A Non-U.S. Holder generally will not be subject to United States
federal income tax (subject to the discussion under "Information Reporting and
Backup Withholding" below) on gain recognized on a sale or other disposition
(including a redemption) of Notes unless (i) the gain is effectively connected
with the conduct of a trade or business within the United States by the Non-U.S.
Holder or (ii) in the case of a Non-U.S. Holder who is a nonresident alien
individual and holds the Notes as a capital asset, such holder is present in the
United States for 183 or more days in the taxable year of the sale or
disposition and either has a "tax home" (as defined for United States federal
income tax purposes) in the United States or an office or other fixed place of
business in the United States to which the sale or disposition is attributable.
INFORMATION REPORTING AND BACKUP WITHHOLDING
In the case of payment of interest to Non-U.S. Holders, temporary
Treasury Regulations provide that the 31% backup withholding and other reporting
will not apply to such payments with respect to which either the requisite
certification, as described above, has been received or an exemption has
otherwise been established (provided that neither the Company nor its paying
agent has actual knowledge that the holder is a United States person or the
conditions of any other exemption are not in fact satisfied). Under temporary
Treasury Regulations, these information reporting and backup withholding
requirements will apply, however, to the gross proceeds paid to a foreign person
upon the disposition of the Notes by or through a United States office of a
United States or foreign broker, unless the holder certifies to the broker under
penalties of perjury as to its name, address and status as a foreign person or
the holder otherwise establishes an exemption. Information reporting
requirements (but not
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backup withholding) will also apply to a payment of the proceeds of a
disposition of the Notes by or through a foreign office of (i) a United States
broker, (ii) a foreign broker 50% or more of whose gross income for certain
periods is effectively connected with the conduct of a trade or business in the
United States or (iii) a foreign broker that is a "controlled foreign
corporation", unless the broker has documentary evidence in its records that the
holder is a non-United States holder and certain other conditions are met, or
the holder otherwise establishes an exemption. Neither information reporting nor
backup withholding will generally apply to a payment of the proceeds of a
disposition of the Notes by or through a foreign office of a foreign broker not
subject to the preceding sentence.
REFUNDS
Any amounts withheld under the backup withholding rules from a payment
to a holder will be allowed as a refund or a credit against such holder's United
States federal income tax liability, provided that the required information is
furnished to the Internal Revenue Service.
OTHER TAX CONSIDERATIONS
There may be other federal, state, local or foreign tax considerations
applicable to the circumstances of a particular holder of Notes. ACCORDINGLY,
EACH HOLDER OF NOTES IS ADVISED TO CONSULT HIS, HER OR ITS TAX ADVISOR REGARDING
THE PARTICULAR TAX CONSEQUENCES TO SUCH HOLDER OF THE EXCHANGE OF OLD NOTES FOR
NEW NOTES AND OWNERSHIP AND DISPOSITION OF THE NEW NOTES.
PLAN OF DISTRIBUTION
Each broker-dealer that receives New Notes for its own account pursuant
to the Exchange Offer must acknowledge that it will deliver a prospectus in
connection with any resale of such New Notes. This Prospectus, as it may be
amended or supplemented from time to time, may be used by a broker-dealer in
connection with resales of New Notes received in exchange for Old Notes where
such Old Notes were acquired as a result of market-making activities or other
trading activities. The Company has agreed that, for a period of 180 days after
the Expiration Date, it will make this Prospectus, as amended or supplemented,
available to any broker-dealer for use in connection with any such resale. In
addition, until ____________, 199__, all dealers effecting transactions in the
New Notes may be required to deliver a prospectus.
The Company will not receive any proceeds from any sale of New Notes by
broker-dealers. New Notes received by broker-dealers for their own account
pursuant to the Exchange Offer may be sold from time to time in one or more
transactions in the over-the-counter market, in negotiated transactions, through
the writing of options on the New Notes or a combination of such methods of
resale, at market prices prevailing at the time of resale, at prices related to
such prevailing market prices or negotiated prices. Any such resale may be made
directly to purchasers or to or through brokers or dealers who may receive
compensation in the form of commissions or concessions from any such
broker-dealer or the purchasers of any such New Notes. Any broker-dealer that
resells New Notes that were received by it for its own account pursuant to the
Exchange Offer and any broker or dealer that participates in a distribution of
such New Notes may be deemed to be an "underwriter" within the meaning of the
Securities Act and any profit on any such resale of New Notes and any commission
or concessions received by any such persons may be deemed to be underwriting
compensation under the Securities Act. The Letter of Transmittal states that, by
acknowledging that it will deliver and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company will
promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the reasonable expenses of one counsel
for the Holders of the Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the Holders of the Notes (including any
broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
<PAGE> 94
86
LEGAL MATTERS
The validity of the New Notes offered hereby will be passed upon for
the Company by Krugman, Chapnick & Grimshaw, Saddle Brook, New Jersey.
EXPERTS
The consolidated financial statements of Electronic Retailing Systems
International, Inc. as of December 31, 1994 and 1995 and for each of the three
years in the period ended December 31, 1995 included in this Prospectus have
been so included in reliance on the report of Price Waterhouse LLP, independent
accountants, given on the authority of said firm as experts in auditing and
accounting.
With respect to the unaudited condensed consolidated financial
information of Electronic Retailing Systems International, Inc. for the
nine-month periods ended September 30, 1995 and 1996, included in this
Prospectus, Price Waterhouse LLP reported that they have applied limited
procedures in accordance with professional standards for a review of such
information. However, their separate report dated November 14, 1996 appearing
herein, states that they did not audit and they do not express an opinion on
that unaudited condensed consolidated financial information. Price Waterhouse
LLP has not carried out any significant or additional audit tests beyond those
which would have been necessary if their report had not been included.
Accordingly, the degree of reliance on their report on such information should
be restricted in light of the limited nature of the review procedures applied.
Price Waterhouse LLP has not carried out any significant or additional audit
tests beyond those which would have been necessary if their report had not been
included. Accordingly, the degree of reliance on their report on such
information should be restricted in light of the limited nature of the review
procedures applied. Price Waterhouse LLP is not subject to the liability
provisions of section 11 of the Securities Act of 1933 for their report on the
unaudited condensed consolidated financial information because that report is
not a "report" or a "part" of the registration statement prepared or certified
by Price Waterhouse LLP within the meaning of sections 7 and 11 of the Act.
<PAGE> 95
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants..................................................... F-2
Consolidated Balance Sheet as of December 31, 1994 and 1995........................... F-3
Consolidated Statement of Operations for the Year Ended December 31, 1993, 1994 and
1995................................................................................ F-4
Consolidated Statement of Cash Flows for the Year Ended December 31, 1993, 1994 and
1995................................................................................ F-5
Consolidated Statement of Changes in Stockholders' Equity for the Year Ended December
31, 1993, 1994 and 1995............................................................. F-6
Notes to Consolidated Financial Statements............................................ F-7
INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Accountants on Interim Condensed Consolidated Financial
Information......................................................................... F-15
Condensed Consolidated Balance Sheet as of December 31, 1995 and September 30, 1996
(unaudited)......................................................................... F-16
Condensed Consolidated Statement of Operations for the Nine Months Ended September 30,
1995 and 1996 (unaudited)........................................................... F-17
Condensed Consolidated Statement of Cash Flows for the Nine Months Ended September 30,
1995 and 1996 (unaudited)........................................................... F-18
Notes to Condensed Consolidated Financial Statements (unaudited)...................... F-19
</TABLE>
F-1
<PAGE> 96
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Electronic Retailing Systems International, Inc.
In our opinion, the consolidated financial statements listed in the index
on page F-1 present fairly, in all material respects, the financial position of
Electronic Retailing Systems International, Inc. and its subsidiaries (the
"Company") at December 31, 1994 and 1995, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995, in conformity with generally accepted accounting principles. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based upon
our audits. We conducted our audits of these statements in accordance with
generally accepted auditing standards which require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements,
assessing the accounting principles used and significant estimates made by
management, and evaluating the overall financial statement presentation. We
believe that our audits provide a reasonable basis for the opinion expressed
above.
Since the date of completion of our audit of the accompanying consolidated
financial statements and initial issuance of our report thereon dated March 27,
1996, which report contained an explanatory paragraph regarding the Company's
ability to continue as a going concern, the Company, as discussed in Note 13,
completed an offshore public offering and contemporaneous private placement
resulting in the receipt of net proceeds of approximately $12 million.
Therefore, the conditions that raised substantial doubt about whether the
Company will continue as a going concern no longer exist.
PRICE WATERHOUSE LLP
Stamford, Connecticut
March 27, 1996, except for Note 13, as to which
the date is July 11, 1996
F-2
<PAGE> 97
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED BALANCE SHEET
(IN THOUSANDS, EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
DECEMBER 31,
---------------------
1994 1995
-------- --------
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents (Note 2)................................... $ 1,131 $ 3,210
Short-term investments (Note 2)...................................... 950 --
Accounts receivable -- net of allowance for doubtful accounts of $64
in 1994 and $88 in 1995........................................... 504 1,356
Receivables from affiliates (Note 4)................................. 27 8
Installations in progress............................................ 120 522
Inventories -- net of reserves of $102 in 1994 and $195 in 1995 (Note
2)................................................................ 1,376 1,874
Prepayments and other current assets................................. 290 79
-------- --------
Total current assets.............................................. 4,398 7,049
-------- --------
Equipment (Note 2)..................................................... 1,667 2,047
Accumulated depreciation............................................. (1,003) (1,365)
-------- --------
Net equipment........................................................ 664 682
-------- --------
Other non-current assets............................................... 133 585
-------- --------
Total assets........................................................... $ 5,195 $ 8,316
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses................................ $ 691 $ 1,549
Accrued salaries and benefits........................................ 140 217
Upgrade obligations.................................................. 115 --
-------- --------
Total current liabilities......................................... 946 1,766
-------- --------
Long-term debt (Note 7)................................................ 1,981 3,335
-------- --------
Commitments (Note 9)................................................... -- --
-------- --------
Stockholders' equity
Preferred stock, undesignated (par value $1.00 per share; 1,860,000
shares authorized, none outstanding)
Series A Cumulative, Convertible Preferred Stock (140,000 shares
authorized; 123,246 shares issued and outstanding in 1995,
including 2,049 shares issued January 1, 1996 as a stock dividend
to holders of record on December 31, 1995)........................ -- 123
Common stock (par value $0.01 per share; 25,000,000 shares
authorized; 11,720,466 and 11,748,232 shares issued and
outstanding in 1994 and 1995, respectively)....................... 117 117
Additional paid-in capital........................................... 26,457 38,474
Accumulated deficit (Note 3)......................................... (24,306) (35,499)
-------- --------
Total stockholders' equity................................... 2,268 3,215
-------- --------
Total liabilities and stockholders' equity............................. $ 5,195 $ 8,316
======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-3
<PAGE> 98
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
REVENUES
Product sales............................................ $ 1,074 $ 2,227 $ 2,663
Maintenance.............................................. 48 149 310
-------- -------- --------
Total revenues................................... 1,122 2,376 2,973
-------- -------- --------
COST OF GOODS SOLD
Product sales............................................ 1,607 3,316 3,552
Maintenance.............................................. 111 506 561
-------- -------- --------
Total cost of goods sold......................... 1,718 3,822 4,113
-------- -------- --------
Gross profit (loss)...................................... (596) (1,446) (1,140)
-------- -------- --------
OPERATING EXPENSES
Selling, general and administrative (including amounts to
related parties of $523 in 1993, $76 in 1994 and $91
in 1995) (Note 4)..................................... 5,966 6,039 6,952
Research and development (including amounts to related
parties of $26 in 1993) (Note 10)..................... 2,325 2,571 2,491
Stock option compensation (Note 11)...................... 7,454 1,119 27
Depreciation and amortization............................ 177 149 107
-------- -------- --------
Total operating expenses......................... 15,922 9,878 9,577
-------- -------- --------
Loss from operations..................................... (16,518) (11,324) (10,717)
-------- -------- --------
OTHER INCOME (EXPENSES)
Interest income.......................................... 438 288 134
Interest expense (including amounts to related parties of
$315 in 1993 and $52 in 1995) (Note 5)................ (340) (65) (291)
Gain (loss) on short-term investments (Note 2)........... -- (177) 6
-------- -------- --------
Total other income (expenses).................... 98 46 (151)
-------- -------- --------
Loss before minority interest in consolidated
affiliate............................................. (16,420) (11,278) (10,868)
-------- -------- --------
Minority interest in loss of consolidated affiliate (Note
3)....................................................... 423 -- --
-------- -------- --------
Net loss.............................................. $(15,997) $(11,278) $(10,868)
======== ======== ========
EARNINGS PER SHARE
Weighted average common shares outstanding............... 11,461 11,682 11,743
======== ======== ========
Net loss per common share................................ $ (1.40) $ (0.97) $ (0.95)
======== ======== ========
</TABLE>
See accompanying notes to consolidated financial statements
F-4
<PAGE> 99
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------
1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
NET CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss................................................... $(15,997) $(11,278) $(10,868)
Adjustments to reconcile net loss to net cash used in
operating activities:
Depreciation and amortization............................ 367 374 463
Provision for inventory obsolescence..................... 104 93 94
Provision for doubtful accounts.......................... 56 38 82
Stock option compensation................................ 7,454 1,119 27
Minority interest in loss of consolidated affiliate...... (423) -- --
Accounts receivable...................................... (729) 179 (935)
Inventories.............................................. (889) (534) (591)
Other current and non-current assets..................... 51 (127) (252)
Accrued liabilities and deferred compensation............ (1,849) 110 820
-------- -------- --------
Net cash used in operating activities............ (11,855) (10,026) (11,160)
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Proceeds from sales or maturities of short-term 2,559 7,040 1,027
investments...........................................
Capital expenditures..................................... (574) (303) (452)
Capitalized software costs............................... -- -- (475)
Purchases of short-term investments...................... (10,626) -- --
-------- -------- --------
Cash (used in) provided by investing (8,641) 6,737 100
activities.....................................
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Borrowings under line of credit.......................... -- -- 3,000
Net proceeds from the issuance of preferred stock........ -- -- 8,789
Net proceeds from the issuance of long-term note and -- 1,899 1,350
warrant...............................................
Net proceeds from the issuance of common stock........... 18,606 2 --
-------- -------- --------
Cash provided by financing activities............ 18,606 1,901 13,139
-------- -------- --------
Net (decrease) increase in cash and cash equivalents....... (1,890) (1,388) 2,079
-------- -------- --------
Cash and cash equivalents at beginning of period........... 4,409 2,519 1,131
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD................. $ 2,519 $ 1,131 $ 3,210
======== ======== ========
</TABLE>
There were no cash payments for income taxes in the years 1993, 1994 and
1995. Cash payments for interest expense were $126, $45 and $262 in 1993, 1994
and 1995, respectively, including payments of $126 and $52 made to related
parties in 1993 and 1995. In 1995, preferred stock was issued in a non cash
exchange for surrender of $3 million of debt held by preferred stock
subscribers.
See accompanying notes to consolidated financial statements
F-5
<PAGE> 100
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS, EXCEPT SHARE AMOUNTS)
<TABLE>
<CAPTION>
PREFERRED COMMON ADDITIONAL ACCUMULATED
STOCK STOCK PAID-IN CAPITAL DEFICIT
--------- ------ --------------- -----------
<S> <C> <C> <C> <C>
BALANCES AT DECEMBER 31, 1992..................... $ -- $ -- $ 188 $ (19,562)
---- ---- ------- --------
Issuance of 8,500,050 common shares for
outstanding shares of Predecessor
Corporation.................................. 85 (85)
Issuance of 1,421,250 common shares for limited
partner interests in consolidated
affiliate.................................... 14 (14)
Contribution of limited partnership interest in
consolidated affiliate....................... 8,108
Capitalization of deficits accumulated prior to
Reorganization............................... (22,531) 22,531
Contribution of stockholders' loans and accrued
interest thereon............................. 13,608
Proceeds from issuance and sale of 1,600,000
common shares................................ 16 18,590
Vesting of previously issued stock options...... 7,454
Net loss for year............................... (15,997)
---- ---- ------- --------
BALANCES AT DECEMBER 31, 1993..................... $ -- $115 $25,318 $ (13,028)
---- ---- ------- --------
Vesting of previously issued stock options...... 1,119
Issuance of stock warrants...................... 20
Issuance of 193,500 shares with exercise of
stock options................................ 2
Net loss for year............................... (11,278)
---- ---- ------- --------
BALANCES AT DECEMBER 31, 1994..................... $ -- $117 $26,457 $ (24,306)
---- ---- ------- --------
Vesting of previously issued stock options...... 27
Proceeds from issuance and sale of 120,000
shares of preferred stock.................... 120 11,668
Issuance of 3,246 shares of preferred stock as
dividends.................................... 3 322 (325)
Net loss for year............................... (10,868)
---- ---- ------- --------
BALANCES AT DECEMBER 31, 1995..................... $ 123 $117 $38,474 $ (35,499)
==== ==== ======= ========
</TABLE>
See accompanying notes to consolidated financial statements
F-6
<PAGE> 101
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 -- ORGANIZATION:
Electronic Retailing Systems International, Inc., was incorporated in 1993
under the laws of the State of Delaware ("ERS") to serve as a holding company
for the business and assets of Electronic Retailing Systems International, Inc.,
incorporated in 1990 under the laws of Connecticut (the "Predecessor
Corporation"), and ERS Associates Limited Partnership (the "Partnership"), which
was organized in Connecticut in 1992. The combination of ERS, the Predecessor
Corporation, and the Partnership was effected immediately prior to the closing
on May 7, 1993 of ERS's initial public offering of Common Stock (the "Initial
Public Offering"), and is referred to herein as the "Reorganization" (see Note
3). References herein to the operations and historical financial information of
the "Company" prior to the date of Reorganization refer to the operations and
historical financial information of the Predecessor Corporation and its
subsidiaries. Unless the context otherwise requires, all other references herein
to the "Company" refer to ERS.
The Company develops and supplies electronic shelf labeling systems.
Electronic shelf labeling systems replace paper price tags on retail shelves
with liquid crystal display labels and transmit pricing and other information to
and from the aisle. The Company's system is designed to address retailers' needs
for improved pricing accuracy and labor efficiencies by electronically linking a
store's shelves to its POS scanners and central computer. The Company operates
in North America.
NOTE 2 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
Basis of Consolidation
The consolidated financial statements include the accounts of the Company,
the Predecessor Corporation and the Partnership (see Note 3). All significant
intercompany balances and transactions have been eliminated.
Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions covering a broad spectrum of the Company's financial activities, and
while the Company believes these estimates to be prudent, there exists a
possibility that unexpected events might affect these estimates. While actual
results could differ from those estimates, management believes that it is highly
unlikely that any one event would have a material effect on the Company's future
operating results.
Cash Equivalents
Cash equivalents consist of short-term, highly-liquid U.S. Treasury Bills
and certificates of deposits with original maturities of less than three months
and are stated at cost, which approximates market. Interest income is accrued as
earned.
Cash and cash equivalents at December 31, 1994 and 1995 include deposits of
$179,000 and $440,000, respectively, held as interest bearing collateral for
irrevocable letters of credit of the same amount relating to future inventory
purchases. Letters of credit in place at December 31, 1995 expire at various
dates in 1996.
Investments in Debt Securities
The Company's short-term investments have consisted primarily of corporate
debt obligations. Such investments have had maturities of less than one year and
have yielded interest at prevailing interest rates at the time of acquisition.
At December 31, 1994, short-term investments of $1,027,000 were classified
as trading securities and recorded net of a market valuation allowance for
unrealized losses of $77,000. During 1994, realized and
F-7
<PAGE> 102
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
unrealized losses totaling $177,000 were recognized on short-term investments.
Realized gains and realized losses in 1994 totaled $6,000 and $106,000,
respectively. There were no short-term investments at December 31, 1995. During
1995, realized gains of $6,000 were recognized on short-term investments.
Financial Instruments
Financial instruments include cash, short-term investments consisting of
fixed rate overnight deposits and short-term corporate debt obligations, letters
of credit fully collateralized by cash and cash equivalents, accrued salaries
and expenses, and a convertible long-term note. Financial instruments are
carried at cost which approximates fair market value.
Inventories
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market value. Inventories at December 31, 1994 consisted of
approximately $631,000 of materials and supplies and $745,000 of finished goods.
Inventories at December 31, 1995 consist of approximately $674,000 of materials
and supplies and $1,200,000 of finished goods. Inventories in excess of expected
requirements due to new product introductions are expensed currently.
Equipment
Equipment is stated at cost. Depreciation is provided on the straight-line
method over the estimated useful lives of the respective assets, none of which
exceeds five years.
Product Development Costs
The Company capitalizes product development costs, principally wages and
contractor fees, after establishing commercial and technical viability. Product
development costs are stated at the lower of cost or net realizable value. These
costs are amortized using the straight-line method over the shorter of the
estimated useful life of the product or three years. Amortization commences when
the product is available for general release to customers. As of December 31,
1995, unamortized capitalized costs of $468,000 are included as non-current
assets. Amortization expense totaled $7,000 for 1995. There were no amounts
capitalized or amortized in 1993 and 1994.
Revenue Recognition
Revenue is recognized when the product is shipped or upon completion of
installation of a trial electronic shelf label system, provided that no
significant obligations remain and collection of the resulting receivable is
deemed probable. Revenue from providing installation services to customers is
recognized upon the completion of an installation. Maintenance revenue for
services provided under maintenance contracts is recognized over the service
contract period. Other revenue for parts and services is recognized when
provided.
Income Taxes
Prior to the Reorganization, the stockholders of the Predecessor
Corporation had elected to be treated as an "S Corporation" for Federal income
tax purposes as provided for under Section 1362(a) of the Internal Revenue Code.
The election resulted in each stockholder being responsible for his pro-rata
share of the Predecessor Corporation's taxable income. Effective May 7, 1993, in
conjunction with the Reorganization, ERS became subject to taxation as a C
Corporation.
ERS has adopted Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" which requires an asset and liability approach to
the recognition of deferred tax assets and liabilities for the expected future
tax consequences of events that have been recognized in the Company's financial
F-8
<PAGE> 103
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
statements or tax returns. Deferred income taxes relate to timing differences
between financial and income tax reporting for stock option compensation,
product development costs, depreciation and other items.
Earnings Per Share
Net loss per common share is computed using the weighted average number of
common shares and common share equivalents assumed to be outstanding during the
period. Common share equivalents consist of the Company's common shares issuable
upon exercise of stock options and stock purchase warrants.
Pursuant to the requirements of the Securities and Exchange Commission,
stock options granted and shares issued by the Company within one year prior to
the completion of the Initial Public Offering on May 7, 1993, at prices below
the offering price, are included in the calculation of weighted average shares
outstanding through such date. Subsequent to May 7, 1993, the computation of net
loss per common share does not reflect common share equivalents that are
anti-dilutive.
New Accounting Standards
In March 1995, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (FAS) No. 121 Accounting for the
Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed Of,
which is effective for fiscal years beginning after December 15, 1995. FAS 121
requires that an impairment loss be recognized when circumstances indicate that
the carrying amount of an asset may not be recoverable. The adoption of FAS 121
is not expected to have a material impact on the Companys consolidated financial
position or results of operations.
In October 1995, the FASB issued FAS No. 123 Accounting for Stock-Based
Compensation, effective for fiscal years beginning after December 15, 1995. FAS
123 indicates a preference for a fair value based method of accounting for
employee stock options, but allows for continuation of the intrinsic value based
method under Accounting Principles Board Opinion (APB) No. 25 Accounting for
Stock Issued to Employees. The Company has not determined which accounting
method will be implemented, but believes adoption of the new accounting standard
will not have a material impact on the financial position or results of
operations of the Company.
NOTE 3 -- INITIAL PUBLIC OFFERING AND REORGANIZATION:
On May 7, 1993, ERS completed the Initial Public Offering of 1,902,145
shares of Common Stock, registered under the Securities Act of 1933, as amended,
1,600,000 shares of which were sold by ERS and the remainder of which were sold
by selling stockholders. As a result of this transaction, proceeds net of
underwriting discounts, commissions and other expenses of approximately $18.6
million were realized, including amounts used to discharge amounts owed to the
President of the Company (see Note 4).
Immediately prior to the closing of the Initial Public Offering, the
Company restructured. Pursuant to reorganization agreements between the limited
partners of the Partnership and the stockholders of the Predecessor Corporation,
ERS was incorporated in February 1993 as a holding company and (i) issued
8,500,050 shares of its common stock for all outstanding stock of the
Predecessor Corporation, (ii) issued 1,421,250 shares of its Common Stock for
all limited partnership interests in the Partnership, (iii) contributed the
limited partnership interest in the Partnership to the Predecessor Corporation,
and (iv) liquidated the Partnership and transferred ownership of all assets and
liabilities of the Partnership to the Predecessor Corporation.
NOTE 4 -- RELATED PARTY TRANSACTIONS:
Prior to March 1993, certain common costs such as rent of office space
under sublease from an affiliate, telephone and insurance, were paid on behalf
of the Company by an affiliate. The affiliate and the Company
F-9
<PAGE> 104
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
have common majority ownership. These costs were allocated to the Company based
on its pro-rata share of such costs as determined using factors such as
headcount, floor space occupied or other representative reasonable factors. For
the year ended December 31, 1993, the Company reimbursed an affiliate $400,000,
which represents essentially all of the common costs incurred on behalf of the
Company.
Subsequent to March 1993, the Company incurs certain common costs on behalf
of affiliates, which are reimbursed by the affiliates. Additionally, the lease
on the Company's headquarters facility was assumed by the Company, at which time
the Company commenced subleasing a portion of its headquarters facility to an
affiliate. Such common costs, including sublease payments, amounted to $76,000,
$184,000 and $112,000 in 1993, 1994 and 1995, respectively (see Note 9). Unpaid
amounts are included in receivables from affiliates at December 31, 1994 and
1995.
The President of the Company, who is a stockholder, previously had a
deferred compensation arrangement with the Company whereby compensation earned
by the President from inception of the Company (April 18, 1990) through July 1,
1992 including accrued interest was to be deferred until the Company generated
positive cash flow from operations. Salaries earned subsequent to July 1, 1992
were currently payable. All deferred and current compensation amounts then owed,
including accrued interest thereon, totaling $1,070,000, were paid in May 1993
to the President with proceeds from the Initial Public Offering (see Note 3).
Interest expense was $22,000 for the year ended December 31, 1993. Interest on
deferred compensation was based on the prime rate plus 1% adjusted for
fluctuations in the prime rate at six month intervals and averaged 8% in 1993.
Additionally, included in accounts payable and accrued expenses at December 31,
1995 is $37,000 due to an entity controlled by the President for reimbursement
of expenses incurred in the year on behalf of the Company.
The Company has received consulting services and paid a current member of
its Board of Directors fees of $68,000, $38,000 and $34,000 in 1993, 1994 and
1995, respectively. The Company also received consulting services and paid fees
to a former member of the Board of Directors of $81,000, $38,000 and $20,000 in
1993, 1994 and 1995, respectively.
NOTE 5 -- RELATED PARTY INTEREST EXPENSE:
On March 30, 1995, the Company entered into a revolving credit facility
with its principal stockholders and certain members of its Board of Directors
and their affiliates. On July 24, 1995, in connection with the sale of preferred
stock (see Note 6), $3 million in debt borrowed under such revolving credit
facility was surrendered, and the unused portion of the facility in the amount
of $2 million was terminated. Interest expense in 1995 on amounts borrowed under
the line of credit totaled $52,000, at an average rate of prime plus 1%.
Additionally, a facility fee of $100,000 was paid to the lenders pursuant to the
terms of the credit facility.
Prior to the formation of the Partnership, loans from stockholders were the
Company's primary source of operating funds. Interest on the stockholder notes
was based on the prime rate plus 1%, adjusted for fluctuations in the prime rate
at six month intervals. Interest expense for 1993 averaged 8% and totaled
$293,000. These loans and accrued, but unpaid, interest thereon were contributed
to common stock and additional paid-in capital as a result of the Reorganization
(see Note 3).
NOTE 6 -- PREFERRED STOCK:
On July 24, 1995, the Company completed a private sale of 85,000 shares of
its newly-created Series A Cumulative, Convertible Preferred Stock, $1.00 par
value ("Preferred Stock"), for an aggregate purchase price of $8.5 million. The
purchase price was delivered by surrender of $3 million of the Company's debt
held by the subscribers, which consisted of certain members of the Company's
Board of Directors and their affiliates, and cash in the amount of $5.5 million.
F-10
<PAGE> 105
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Subsequent to the aforementioned private sale, an affiliate of the
Company's Chairman of the Board, and one of the subscribers, acquired 35,000
additional shares of Preferred Stock at a purchase price per share of $100.
Each share of Preferred Stock entitles the holder to a dividend of $7.50
per annum, payable quarterly, which will cumulate if not paid. Dividends are
payable by the Company, at its election, in either cash or in the form of
additional shares of Preferred Stock valued at $100 per share. On October 1,
1995 and January 1, 1996, the regular quarterly dividends on the Preferred Stock
were paid, on a pro rata basis for the period during which such shares were
outstanding, to holders of record of such stock on, respectively, September 30,
1995 and December 31, 1995, in the form of additional shares of Preferred Stock
(aggregating 3,246 shares).
Each share of Preferred Stock, valued at $100, is convertible into shares
of the Company's Common Stock, $.01 par value, at a conversion price of $4.00
(subject to certain adjustments), and is subject to redemption, at the option of
the Company, at a price of $100 in the event certain conditions are met. Holders
of Preferred Stock will vote together with holders of Common Stock, each share
carrying one vote, and are entitled to a liquidation preference of $100 per
share.
On the basis of the current conversion price in effect, the 123,246 shares
of Preferred Stock issued and outstanding as of December 31, 1995 are
convertible into an aggregate of 3,081,150 shares of Common Stock.
NOTE 7 -- LONG-TERM LIABILITIES:
On August 12, 1994, the Company completed a financing arrangement with the
Connecticut Development Authority ("CDA"), under which the CDA loaned $2 million
to the Company at closing and agreed to loan the Company up to an additional $3
million through August 12, 1997. At December 31, 1995, $3.35 million was
outstanding under such facility, with the remainder of the $5 million credit
limit advanced in February 1996. Such indebtedness is repayable five years after
closing, accrues interest, payable monthly, at a rate of 7.4% per annum, is
subject to prepayment without premium at the option of the Company, and is
convertible into shares of the Common Stock of the Company. Such indebtedness is
secured by the Company's assets. The Company also issued to the CDA warrants to
purchase 600,000 shares of Common Stock.
During 1995, the Company also entered into agreements with the CDA, which
became effective upon consummation of the initial sale of the Company's
Preferred Stock (see Note 6), whereby, through August 12, 1997, the conversion
price of the debt held by the CDA and the exercise price of its warrants were
reduced so as to be calculated as $3.00 plus the average market price of the
Common Stock during the 18 months prior to conversion, and thereafter as $3.00
plus the average market price of Common Stock during the twelve months prior to
conversion. Pursuant to such agreements, and as a result of additional
provisions contained in the CDA's warrants, effective upon consummation of the
sale of the Preferred Stock, and issuance of the initial dividend thereon: (i)
through August 12, 1997, the exercise price of the CDA's warrants was reduced so
as to be calculated as $2.58 plus the average market price of the Common Stock
during the 18 months prior to exercise, and thereafter as $2.58 plus the average
market price of the Common Stock during the twelve months prior to exercise, and
(ii) the number of shares subject to purchase upon exercise of the CDA's
warrants was adjusted to 699,724.
NOTE 8 -- CUSTOMER INFORMATION:
All of the Company's sales are to customers in the retail food market
industry. During 1993, 1994 and 1995, sales of $654,000, $1,580,000, and
$793,000, respectively, were to a single customer. Sales of $321,000 and
$905,000 in 1994 and 1995, respectively, were to a second retail customer. A
third customer accounted for sales of $272,000 in 1993 and sales of $758,000 in
1995 were to a fourth retail customer.
F-11
<PAGE> 106
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 9 -- LEASES:
The Company leases its facilities under operating lease agreements. During
1993, 1994 and 1995, rental expense amounted to approximately $260,000, $258,000
and $295,000, respectively.
Future minimum lease payments on a calendar year basis under non-cancelable
leases, as of December 31, 1995 are as follows:
<TABLE>
<CAPTION>
TOTAL
COMMITMENTS
-----------
<S> <C>
1996.................................................... $ 330,000
1997.................................................... 196,000
--------
$ 526,000
========
</TABLE>
In March 1993, the Company assumed the lease for its headquarters facility
which prior to such date had been subleased from an affiliate. The Company
subleases a portion of the same facility to an affiliate for which sublease
payments were $54,000 in 1995. Future sublease amounts from its affiliate are
$54,000 and $32,000 in 1996 and 1997, respectively.
NOTE 10 -- RESEARCH AND DEVELOPMENT:
Research and development activities were a major component of the Company's
expenditures and efforts during 1993, 1994 and 1995. The Company's research and
development expenses (including the allocation of salaries) during 1993, 1994
and 1995 were as follows:
<TABLE>
<CAPTION>
1993 1994 1995
---------- ---------- ----------
<S> <C> <C> <C>
Hardware development........................... $ 829,000 $ 989,000 $1,523,000
Software development........................... 1,496,000 1,582,000 968,000
---------- ---------- ----------
Total research and development................. $2,325,000 $2,571,000 $2,491,000
========== ========== ==========
</TABLE>
During 1994 and 1995, the Company had research and development contracts
with unaffiliated parties for both hardware and software elements of its
electronic shelf labeling system. The Company reimbursed these contractors
generally based on milestone achievements or satisfactory performance.
NOTE 11 -- STOCK OPTION AND DEFINED CONTRIBUTION PLAN:
In connection with the Initial Public Offering, the Company implemented an
employee stock option plan whereby options to purchase up to 850,005 shares of
common stock may be granted to key employees of the Company. In June 1994, the
stockholders approved an increase in the number of authorized shares of common
stock available for issuance under the plan from 850,005 to 1,225,000. Options
granted under the plan typically vest over a period of three years, but become
exercisable over a period of five to ten years. The consolidated statement of
operations for the years ended December 31, 1993, 1994 and 1995 include noncash
compensation expense of $7,454,000, $1,119,000, and $27,000, respectively,
representing compensation earned for service through the periods then ended
related to option grants. Based upon the vesting of these options (net of
subsequently terminated options), the Company will record non-cash compensation
expense totaling $43,000 in 1996, assuming no additional terminated options.
F-12
<PAGE> 107
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
A summary of all options activity pursuant to the employee stock option
plan is as follows:
<TABLE>
<CAPTION>
PRICE RANGE OPTIONS
---------------- --------
<S> <C> <C>
Options granted pursuant to the Reorganization......... $.01 725,104
Other option grants in 1993.......................... $5.875 - $6.00 42,633
Options exercised.................................... $.01 (5,666)
Options canceled..................................... $.01 (64,093)
--------
Options outstanding December 31, 1993.................. $.01 - $6.00 697,978
--------
Option grants........................................ $.01 - $8.50 239,823
Options exercised.................................... $.01 (193,500)
Options canceled..................................... $.01 - $5.875 (13,931)
--------
Options outstanding December 31, 1994.................. $.01 - $8.50 730,370
--------
Option grants........................................ $.01 - $5.63 480,205
Options exercised.................................... $.01 (27,766)
Options canceled..................................... $.01 - $8.50 (265,080)
--------
Options outstanding December 31, 1995.................. $.01 - $5.875 917,729
--------
</TABLE>
Additionally, in connection with the Reorganization, the Company
implemented a director stock option plan under which options covering up to
50,000 shares may be granted to directors of the Company. During 1993 and 1994,
25,000 and 7,500 options, respectively, were granted to directors of the Company
to purchase an equal number of common shares pursuant to this plan at an option
prices of $6.75. All such options remain outstanding as of December 31, 1995.
The Company has a defined contribution profit sharing and savings plan
which qualifies under Section 401(k) of the Internal Revenue Code for employees
meeting certain service requirements. Participants may contribute up to 30% of
their gross wages, not to exceed in any given year a limitation set by Internal
Revenue Service regulations (such limitation was $9,240 in 1995). The plan
provides for discretionary matching contributions, as determined by the Board of
Directors, to be made by the Company. There have been no discretionary amounts
contributed to the plan as of December 31, 1995.
NOTE 12 -- INCOME TAXES:
The Company has incurred net losses since inception which have generated
net operating loss carryforwards of $35.0 million for federal income tax
purposes. These carryforwards are available to offset future taxable income and
begin to expire in the years 2008 and 1998 for federal and state income tax
purposes, respectively. These losses are subject to limitation on future years
utilization should certain ownership changes occur.
The net operating loss carryforwards and temporary differences between the
carrying amounts of assets and liabilities for financial reporting and income
tax purposes result in a noncurrent deferred tax benefit at December 31, 1994
and 1995 of $13.2 million and $17.5 million, respectively. In consideration of
the Company's accumulated losses and the uncertainty of its ability to utilize
this deferred tax benefit in the future, the Company has recorded a valuation
allowance of an equal amount on such dates to fully offset the deferred tax
benefit amount.
F-13
<PAGE> 108
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
Significant components of the noncurrent deferred tax asset at December 31,
1994 and 1995 are as follows:
<TABLE>
<CAPTION>
1994 1995
------------ ------------
<S> <C> <C>
Net operating loss carryforwards................ $ 9,926,000 $ 14,568,000
Stock option compensation....................... 2,997,000 2,904,000
Other........................................... 264,000 54,000
------------ ------------
Total deferred tax benefit...................... 13,187,000 17,526,000
Valuation allowance............................. (13,187,000) (17,526,000)
------------ ------------
Net noncurrent deferred tax asset............. $ -- $ --
============ ============
</TABLE>
In 1993, 1994 and 1995 a statutory Federal income tax rate of 34% and a
state income tax rate of 7.6%, net of the Federal tax benefit, was applicable to
the Company. Due to the Company's taxable losses the effective tax rate was nil
in each year.
The financial statement income tax provision differs from income taxes
determined by applying the statutory Federal income tax rate to the financial
statement net loss for the years ended December 31, 1993, 1994 and 1995 as a
result of the following:
<TABLE>
<CAPTION>
1993 1994 1995
----------- ----------- -----------
<S> <C> <C> <C>
Tax benefit at Federal statutory rate....... $ 5,439,000 $ 3,835,000 $ 3,695,000
State income tax benefit, net of Federal tax
charge.................................... 1,214,000 856,000 825,000
Exclusion of 1993 losses prior to the
Reorganization............................ (1,318,000) -- --
Net loss not providing current year tax
benefit................................... (5,213,000) (4,358,000) (4,428,000)
Other....................................... (122,000) (333,000) (92,000)
----------- ----------- -----------
Provision for income taxes............. $ -- $ -- $ --
=========== =========== ===========
</TABLE>
NOTE 13 -- OFFSHORE PUBLIC OFFERING AND CONTEMPORANEOUS PRIVATE PLACEMENT:
On July 11, 1996, the Company completed the offshore public offering of an
aggregate of 4,963,500 shares of Common Stock, $.01 par value, in accordance
with Regulation S under the Securities Act of 1933, and the contemporaneous
private placement to subscribers, including certain members of the Company's
Board of Directors and their affiliates, of an aggregate of 911,657 shares of
Common Stock. Net proceeds from these transactions were approximately $12
million.
In connection with the completion of these transactions, holders of the
Company's Preferred Stock, $1.00 par value, converted their shares, in
accordance with their terms, into an aggregate of 3,138,900 shares of Common
Stock, in exchange for payments aggregating $235,000.
F-14
<PAGE> 109
REPORT OF INDEPENDENT ACCOUNTANTS
To the Stockholders and Board of Directors of
Electronic Retailing Systems International, Inc.
We have reviewed the accompanying interim condensed consolidated financial
information of Electronic Retailing Systems International, Inc. (the "Company")
as of September 30, 1996, and for the nine-month periods ended September 30,
1995 and 1996. This interim condensed consolidated financial information is the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures to
financial data and making inquiries of persons responsible for financial and
accounting matters. It is substantially less in scope than an audit conducted in
accordance with generally accepted auditing standards, the objective of which is
the expression of an opinion regarding the financial statements taken as a
whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that
should be made to the accompanying interim condensed consolidated financial
information for it to be in conformity with generally accepted accounting
principles.
PRICE WATERHOUSE LLP
Stamford, Connecticut
November 14, 1996
F-15
<PAGE> 110
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED BALANCE SHEET
(IN THOUSANDS EXCEPT PER SHARE AND SHARE AMOUNTS)
<TABLE>
<CAPTION>
SEPTEMBER 30,
1996
DECEMBER 31, -------------
1995
------------ (UNAUDITED)
<S> <C> <C>
ASSETS
Current assets
Cash and cash equivalents........................................ $ 3,210 $ 9,651
Accounts receivable.............................................. 1,356 1,611
Inventories...................................................... 1,874 1,505
Prepayments and other current assets............................. 609 206
-------- --------
Total current assets.......................................... 7,049 12,973
-------- --------
Equipment.......................................................... 2,047 2,292
Accumulated depreciation......................................... (1,365) (1,683)
-------- --------
Net equipment.................................................... 682 609
-------- --------
Other non-current assets........................................... 585 883
-------- --------
Total assets............................................. $ 8,316 $ 14,465
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities
Accounts payable and accrued expenses............................ $ 1,766 $ 882
-------- --------
Total current liabilities..................................... 1,766 882
-------- --------
Long-term debt..................................................... 3,335 4,987
-------- --------
Commitments........................................................ -- --
-------- --------
Stockholders' equity
Preferred stock, undesignated (par value $1.00 per share;
1,860,000 and 2,000,000 shares authorized, none outstanding)
Series A Cumulative Convertible Preferred Stock
(140,000 shares and no shares authorized; 123,246 shares and
no shares issued and outstanding in 1995 and 1996)............ 123 --
Common stock (par value $0.01 per share; 25,000,000 shares
authorized; 11,748,232 and 21,034,195 shares issued and
outstanding in 1995 and 1996)................................. 117 210
Additional paid-in capital....................................... 38,474 50,644
Accumulated deficit.............................................. (35,499) (42,258)
-------- --------
Total stockholders' equity.................................... 3,215 8,596
-------- --------
Total liabilities and stockholders' equity............... $ 8,316 $ 14,465
======== ========
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-16
<PAGE> 111
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
REVENUES
Product Sales.................................................. $ 1,718 $ 3,675
Maintenance.................................................... 185 595
------- -------
Total revenues......................................... 1,903 4,270
------- -------
COST OF GOODS SOLD
Product Sales.................................................. 2,382 3,955
Maintenance.................................................... 381 718
------- -------
Total cost of goods sold............................... 2,763 4,673
------- -------
Gross profit (loss)............................................ (860) (403)
------- -------
OPERATING EXPENSES
Selling, general and administrative (including amounts to
related parties of $85 and $28 during the nine months ended
September 30, 1995 and 1996)................................ 5,044 5,080
Research and development....................................... 2,094 786
Depreciation and amortization.................................. 81 123
Stock option compensation...................................... 80 32
------- -------
Total operating expenses............................... 7,299 6,021
------- -------
Loss from operations........................................... (8,159) (6,424)
------- -------
OTHER INCOME (EXPENSES)
Interest income................................................ 82 179
Interest expense (including amounts to related parties of $52
during the nine months ended September 30, 1995)............ (223) (283)
Gain on short-term investments................................. 5 --
------- -------
Total other income (expenses).......................... (136) (104)
------- -------
Net loss.................................................... $(8,295) $(6,528)
======= =======
EARNINGS PER SHARE
Average common shares outstanding.............................. 11,741 14,528
======= =======
Net loss per common share...................................... $ (0.72) $ (0.47)
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-17
<PAGE> 112
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
-------------------
1995 1996
------- -------
<S> <C> <C>
NET CASH FLOWS USED IN OPERATING ACTIVITIES:
Net loss................................................................. $(8,295) $(6,528)
Other adjustments to reconcile net loss to net cash...................... 42 201
------- -------
Cash used in operating activities...................................... (8,253) (6,327)
------- -------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures..................................................... (287) (245)
Capitalized product development costs.................................... (78) (513)
Proceeds from sales of short-term investments............................ 1,027 --
------- -------
Cash provided by (used in) investing activities........................ 662 (758)
------- -------
CASH FLOWS FROM FINANCING ACTIVITIES:
Net proceeds from issuance of common stock............................... -- 12,111
Net proceeds from issuance of long term note............................. 1,350 1,650
Payment upon conversion of preferred stock............................... -- (235)
Net proceeds from issuance of preferred stock............................ 10,585 --
------- -------
Cash provided by financing activities.................................. 11,935 13,526
------- -------
Net increase in cash and cash equivalents.............................. 4,344 6,441
------- -------
Cash and cash equivalents at beginning of period......................... 1,131 3,210
------- -------
CASH AND CASH EQUIVALENTS AT END OF PERIOD............................... $ 5,475 $ 9,651
======= =======
</TABLE>
See accompanying notes to condensed consolidated financial statements
F-18
<PAGE> 113
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1996
(UNAUDITED)
NOTE 1 -- BASIS OF CONSOLIDATION:
Electronic Retailing Systems International, Inc. ("ERS" or the "Company"),
was incorporated in 1993 under the laws of the State of Delaware as a holding
company for the business and assets of Electronic Retailing Systems
International, Inc., incorporated in 1990 under the laws of Connecticut, and an
affiliated partnership. The condensed consolidated financial statements include
the accounts of the Company and all of its subsidiaries. All significant
intercompany balances and transactions have been eliminated.
NOTE 2 -- BASIS OF PRESENTATION:
The accompanying unaudited condensed consolidated financial statements have
been prepared in accordance with generally accepted accounting principles for
interim financial information and the instructions to Form 10-Q and Article 10
of Regulation S-X. Accordingly, they do not include all of the information and
footnotes required by generally accepted accounting principles for complete
financial statements.
In the opinion of management, the accompanying unaudited condensed
consolidated financial statements include all adjustments, consisting of normal
recurring accruals, considered necessary for a fair presentation of the results
of the interim periods. Operating results for the nine month period ended
September 30, 1996 are not necessarily indicative of the results to be expected
for the full year ending December 31, 1996. The accompanying unaudited condensed
consolidated financial statements should be read in conjunction with the
consolidated financial statements and notes thereto for the year ended December
31, 1995.
Loss per common share is computed using the weighted average number of
common shares and common share equivalents assumed to be outstanding during the
period. Common share equivalents consist of the Company's common shares issuable
upon exercise of stock options and stock purchase warrants. The computation of
loss per common share does not reflect common share equivalents that are
anti-dilutive.
Cash and cash equivalents at December 31, 1995 include deposits of
approximately $440,000 held as interest bearing collateral for irrevocable
letters of credit of the same amounts relating to future inventory purchases.
NOTE 3 -- INVENTORIES:
Inventories are stated at the lower of cost (determined on a first in,
first out basis) or market value. Inventories at December 31, 1995 consisted of
$674,000 of materials and supplies and $1,200,000 of finished goods. Inventories
at September 30, 1996 consist of $622,000 of materials and supplies and $883,000
of finished goods. Inventories in excess of expected requirements due to new
product introductions or product enhancements are expensed currently.
NOTE 4 -- ADOPTION OF NEW ACCOUNTING STANDARD:
ERS has adopted Statement of Financial Accounting Standards No. 123
"Accounting for Stock-Based Compensation" ("FAS 123"). FAS 123 indicates a
preference for a fair value based method of accounting for employee stock
options, but allows for continuation of the intrinsic value based method under
Accounting Principles Board Opinion No. 15 "Accounting for Stock Issued to
Employees". The Company has chosen to continue its use of the intrinsic value
based method of accounting, but will present required financial statement
disclosures it its Annual Report on Form 10-K for the year ending December 31,
1996.
F-19
<PAGE> 114
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
NOTE 5 -- COMMON STOCK OFFERING:
On July 11, 1996, the Company completed the offshore public offering of an
aggregate of 4,963,500 shares of its common stock, $.01 par value ("Common
Stock"), in accordance with Regulation S under the Securities Act of 1933, and
the contemporaneous private placement to subscribers, including certain members
of the Company's Board of Directors and their affiliates, of an aggregate of
911,657 shares of Common Stock. Net proceeds from these transactions were
approximately $12 million.
In connection with the completion of these transactions, holders of the
Company's Series A Cumulative Convertible Preferred Stock, $1.00 par value,
("Preferred Stock") converted their shares, in accordance with their terms, into
an aggregate of 3,138,900 shares of Common Stock, in exchange for payments
aggregating $235,000.
F-20
<PAGE> 115
NO DEALER, SALESPERSON OR OTHER PERSON HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATION NOT CONTAINED IN THIS PROSPECTUS OR
THE ACCOMPANYING LETTER OF TRANSMITTAL AND, IF GIVEN OR MADE, SUCH INFORMATION
OR REPRESENTATION MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED BY THE
COMPANY OR ANY INITIAL PURCHASER. NEITHER THIS PROSPECTUS NOT THE ACCOMPANYING
LETTER OF TRANSMITTAL CONSTITUTES AN OFFER TO SELL OR A SOLICITATION OF AN OFFER
TO BUY ANY OF THE SECURITIES OFFERED HEREBY IN ANY JURISDICTION TO ANY PERSON TO
WHOM IT IS UNLAWFUL TO MAKE SUCH OFFER IN SUCH JURISDICTION. NEITHER THE
DELIVERY OF THIS PROSPECTUS OR THE ACCOMPANYING LETTER OF TRANSMITTAL NOR ANY
SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUMSTANCES, CREATE ANY IMPLICATION THAT
THE INFORMATION CONTAINED HEREIN IS CORRECT AS OF ANY TIME SUBSEQUENT TO THE
DATE HEREOF OR THAT THERE HAS BEEN NO CHANGE IN THE AFFAIRS OF THE COMPANY SINCE
SUCH DATE.
UNTIL __________, 199_, ALL DEALERS EFFECTING TRANSACTIONS IN THE NEW
NOTES, WHETHER OR NOT PARTICIPATING IN THIS DISTRIBUTION, MAY BE REQUIRED TO
DELIVER A PROSPECTUS. THIS IS IN ADDITION TO THE OBLIGATION OF DEALERS TO
DELIVER A PROSPECTUS WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR
UNSOLD ALLOTMENTS OF SUBSCRIPTIONS.
TABLE OF CONTENTS
<TABLE>
<CAPTION>
PAGE
----
<S> <C>
Available Information ................................................. ii
Incorporation of Certain Documents by Reference ....................... ii
Prospectus Summary .................................................... 1
Risk Factors .......................................................... 10
The Exchange Offer .................................................... 19
Use of Proceeds ....................................................... 26
Capitalization ........................................................ 27
Selected Historical Consolidated Financial and Certain Other Data ..... 28
Management's Discussion and Analysis of Financial Condition and Results
of Operations ....................................................... 31
Business .............................................................. 38
Management ............................................................ 50
Description of the Notes .............................................. 51
Certain Federal Income Tax Consequences ............................... 79
Plan of Distribution .................................................. 85
Legal Matters ......................................................... 86
Experts ............................................................... 86
Index to Financial Statements ......................................... F-1
</TABLE>
ELECTRONIC RETAILING
SYSTEMS
INTERNATIONAL, INC.
OFFER TO EXCHANGE ITS
13-1/4% SENIOR DISCOUNT
NOTES DUE 2004
WHICH HAVE BEEN
REGISTERED UNDER THE
SECURITIES ACT OF 1933, AS
AMENDED, FOR ANY AND
ALL OF ITS OUTSTANDING
13-1/4% SENIOR DISCOUNT
NOTES DUE 2004
PROSPECTUS
MARCH ___, 1997
<PAGE> 116
PART II
INFORMATION NOT REQUIRED IN PROSPECTUS
ITEM 20. INDEMNIFICATION OF DIRECTORS AND OFFICERS
Under the provisions of Paragraph Sixth of the Certificate of
Incorporation of the Company, as amended, and Section 145 of the Delaware
General Corporation Law the Company is required to indemnify a director or
officer of the Company for expenses arising out of legal proceedings in which
the director or officer became involved by reason of his position as a director
or officer of the Company, if he acted in good faith and in a manner he
reasonably believed to be in or not opposed to the best interests of the Company
and, with respect to any criminal proceeding, if he had no reasonable cause to
believe his conduct was unlawful. In a proceeding to procure a judgment in the
Company's favor, a director or officer may be indemnified for expenses incurred
by him in connection with the defense or settlement of the suit if he acted in
good faith and in a manner he reasonably believed to be in or not opposed to the
best interests of the Company, except that no indemnification shall be permitted
without a court order in respect of any claim, issue, or matter as to which such
director or officer shall have been adjudged to be liable for negligence or
misconduct in the performance of his duty to the Company. Indemnification of a
director or officer as provided above, unless court-ordered, shall be made by
the Company only upon a determination that indemnification is proper in a
specific case because the conduct of such director or officer meets the
standards set forth above. Such determination shall be made (i) by a vote of the
majority of a quorum consisting of directors who were not parties to the
proceeding involved, (ii) by independent counsel in a written opinion, or (iii)
by the stockholders of the Company.
Paragraph Seventh of the Certificate of Incorporation of the Company,
as amended, eliminates the personal liability of a director of the Company to
the Company or to any of its stockholders for monetary damages for a breach of
his fiduciary duty as a director, except in the case where the director breached
his duty of loyalty, failed to act in good faith, engaged in intentional
misconduct or knowingly violated a law, authorized the payment of a dividend or
approved a stock repurchase in violation of Delaware corporate law, or obtained
an improper personal benefit.
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) The following is a complete list of Exhibits filed as part of this
Registration Statement, which Exhibits are incorporated herein:
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
1.1 Purchase Agreement dated as of January 20, 1997 between the
Company and the Initial Purchasers.
3.1 Certificate of Incorporation of the Company, together with all
amendments thereto.
3.2 By-laws of the Company, together with all amendments thereto.
4.1 Indenture, dated as of January 24, 1997, between the Company
and United States Trust Company of New York (the "Trustee").
4.2 Form of Note (contained in Indenture filed as Exhibit 4.1).
4.3 Registration Rights Agreement dated as of January 20, 1997
between the Company and the Initial Purchasers.
5.1* Opinion of Krugman, Chapnick & Grimshaw as to the legality of
the securities being registered hereunder.
</TABLE>
II-1
<PAGE> 117
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.1 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Principal Subsidiary, Norton Garfinkle, The
G/N Garfinkle Trust, Bruce F. Failing, Jr., The Failing Trust,
Elizabeth Z. Failing, Robert D. Power and John Stevens
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12, 1993
among the Company, Norton Garfinkle, The G/N Garfinkle Trust,
Bruce F. Failing, Jr., The Failing Trust, Elizabeth Z.
Failing, Robert D. Power and John Stevens (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.3 Form of Restated Stockholders' Agreement dated March 12, 1993
among Norton Garfinkle, The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust and Elizabeth Z. Failing
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Partnership, the Principal Subsidiary, and
the limited partners of the Partnership (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.5 Form of Registration Rights Agreement dated March 12, 1993
among the Company and the limited partners of the Partnership
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24, 1995,
between the Company and, respectively, Donald E. Zilkha, Bruce
F. Failing, Jr., Hanseatic Corporation and Garfinkle Limited
Partnership II (incorporated by reference to Exhibit 5(c) of
the Company's Current Report on Form 8-K dated July 24, 1995).
10.7 Registration Rights Agreement dated as of July 24, 1995 among
the Company, Donald E. Zilkha, Bruce F. Failing, Jr.,
Hanseatic Corporation and Garfinkle Limited Partnership II
(incorporated by reference to Exhibit 5(d) of the Company's
Current Report on Form 8-K dated July 24, 1995).
10.8 Lease dated as of June 8, 1992 between the Company (as
assignee) and Wilton Office Associates Limited Partnership
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.9 Technical Services Agreement dated October 1, 1985 between
Telepanel, Inc. and Amacrine International, Inc. (incorporated
by reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.10 License Agreement dated January 27, 1993 between the Company
and Telepanel Systems, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.11 Note and Warrant Purchase Agreement dated as of August 12,
1994 among the Company, the Predecessor Corporation and the
Connecticut Development Authority (incorporated by reference
to Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
</TABLE>
II-2
<PAGE> 118
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
10.12 7.4% Convertible Note dated August 12, 1994 executed by the
Company and the Principal Subsidiary to the Connecticut
Development Authority (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994).
10.13 Stock Subscription Warrant dated August 12, 1994 issued by the
Company to the Connecticut Development Authority (incorporated
by reference to Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
10.14 Conditional Assignment and Security Agreement dated August 12,
1994 among the Company, the Principal Subsidiary and the
Connecticut Development Authority (incorporated by reference
to Exhibit 10(d) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
10.15 Revolving Credit Loan Agreement dated as of March 30, 1995
between the Company and the lenders named in Annex 1
(incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994).
10.16 Placing Agreement dated July 5, 1996 between the Company and
Henderson Crosthwaite Institutional Brokers Limited
(incorporated by reference to Exhibit 5(c) to the Company's
Current Report on Form 8-K dated July 11, 1996).
10.17 Agreement with respect to U.S. Securities Laws dated July 2,
1996 between the Company and Henderson Crosthwaite
Institutional Brokers Limited (incorporated by reference to
Exhibit 5(d) to the Company's Current Report on Form 8-K dated
July 11, 1996).
10.18 Forms of Subscription Agreement accepted July 5, 1996 by the
Company (incorporated by reference to Exhibit 5(f) to the
Company's Current Report on Form 8-K dated July 11, 1996).
10.19 Registration Rights Agreement dated July 11, 1996 between the
Company and the subscribers parties thereto (incorporated by
reference to Exhibit 5(g) to the Company's Current Report on
Form 8-K dated July 11, 1996).
10.20 Warrant Agreement dated as of January 24, 1997, between the
Company and American Stock Transfer & Trust Company.
10.21 Promissory Note dated October 7, 1992 of Paul M. Patrick in
favor of the Company (incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 No.
33-59486).
10.22 Electronic Retailing Systems International, Inc. 1993 Employee
Stock Option Plan.
10.23 Electronic Retailing Systems International, Inc. 1993 Director
Stock Option Plan.
11.1 Statement of Computation of Per Share Earnings (incorporated
by reference to Exhibit 11 to the Company's Form 10-Q for the
quarter ended September 30, 1996, as amended).
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges.
</TABLE>
II-3
<PAGE> 119
<TABLE>
<CAPTION>
Exhibit Number Description
- -------------- -----------
<S> <C>
15.1 Letter from Price Waterhouse LLP re unaudited interim
financial information.
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
23.1 Consent of Price Waterhouse LLP.
23.2* Consent of Krugman, Chapnick & Grimshaw.
24.1 Power of Attorney (appearing on Signature Page).
25.1 Form T-1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27 to the Company's Form 10-Q for the quarter ended September
30, 1996, as amended).
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- ---------------------
* To be filed by amendment.
ITEM 22. UNDERTAKINGS
(a) The undersigned registrant hereby undertakes:
(1) To file, during any period in which offers or sales are being made,
a post-effective amendment to this registration statement:
(i) To include any prospectus required by section 10(a)(3) of
the Securities Act of 1933;
(ii) To reflect in the prospectus any facts or events arising
after the effective date of the registration statement (or the most
recent post-effective amendment thereof) which, individually or in the
aggregate, represent a fundamental change in the information set forth
in the registration statement;
(iii) To include any material information with respect to the
plan of distribution not previously disclosed in the registration
statement or any material change to such information in the
registration statement.
Provided, however, that paragraphs (a)(1)(i) and (a)(2)(ii) above do not apply
if the registration statement is on Form S-3 or Form S-8, and the information
required to be included in a post-effective amendment by those paragraphs is
contained in periodic reports filed with or furnished to the Commission by the
Company pursuant to section 13 or section 15(d) of the Exchange Act that are
incorporated by reference in the registration statement.
(2) That, for the purpose of determining any liability under the
Securities Act of 1933, each such post-effective amendment shall be deemed to be
a new registration statement relating to the securities offered therein, and the
offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
II-4
<PAGE> 120
(3) To remove from registration by means of a post-effective amendment
any of the securities being registered which remain unsold at the termination of
the offering.
(b) The undersigned registrant hereby undertakes that, for purposes of
determining any liability under the Securities Act of 1933, each filing of the
registrant's annual report pursuant to section 13(a) or section 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an
employee benefit plan's annual report pursuant to section 15(d) of the
Securities Exchange Act of 1934) that is incorporated by reference in the
registration statement shall be deemed to be a new registration statement
relating to the securities offered therein, and the offering of such securities
at that time shall be deemed to be the initial bona fide offering thereof.
(c) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 ("Act") may be permitted to directors, officers and
controlling persons of the registrant pursuant to the foregoing provisions, or
otherwise, the registrant has been advised that in the opinion of the Securities
and Exchange Commission, such indemnification is against public policy as
expressed in the Act and is, therefore, unenforceable. In the event that a claim
for indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in the successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question of whether such
indemnification by it is against public policy as expressed in the Act and will
be governed by the final adjudication of such issue.
(d) The undersigned registrant hereby undertakes to file an application
for the purpose of determining the eligibility of the Trustee to act under
subsection (a) of Section 310 of the Trust Indenture Act ("Act") in accordance
with the rules and regulations prescribed by the Commission under Section
305(b)(2) of the Act.
(e) The undersigned registrant hereby undertakes to respond to requests
for information that is incorporated by reference into the prospectus pursuant
to Items 4, 10(b), 11, or 13 of this Form, within one business day of receipt of
such request, and to send the incorporated documents by first class mail or
other equally prompt means. This includes information contained in documents
filed subsequent to the effective date of the registration statement through the
date of responding to the request.
(f) The undersigned registrant hereby undertakes to supply by means of
a post-effective amendment all information concerning a transaction, and the
company being acquired involved therein, that was not the subject of and
included in the registration statement when it became effective.
II-5
<PAGE> 121
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the Company
has duly caused this Registration Statement to be signed on its behalf by the
undersigned, thereunto duly authorized, in the City of Wilton, State of
Connecticut, on February 14, 1997.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By: /s/ Bruce F. Failing, Jr.
------------------------------------
Bruce F. Failing, Jr., Vice
Chairman of the Board and
Principal Executive Officer
POWER OF ATTORNEY
Know All Men By These Presents, that each person whose signature
appears below constitutes and appoints Norton Garfinkle, Bruce F. Failing, Jr.
and William B. Fischer, and each of them, such person's true and lawful
attorneys-in-fact and agents, with full power of substitution and revocation,
for such person and in such person's name, place and stead, in any and all
capacities to sign any and all amendments (including post-effective amendments)
to this Registration Statement and any other documents and instruments
incidental thereto, and to file the same with all exhibits thereto, and other
documents in connection therewith, with the Securities and Exchange Commission,
granting unto said attorneys-in-fact and agents, and each of them, full power
and authority to do and perform each and every act and thing requisite and
necessary to be done, as fully to all intents and purposes as such person might
or could do in person, hereby ratifying and confirming all that said
attorneys-in-fact and agents or any of them, or their or his substitute or
substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed by the following persons in the
capacities and on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
/s/ Bruce F. Failing, Jr. Vice Chairman of the Board and February 14, 1997
- ------------------------- Principal Executive Officer
Bruce F. Failing, Jr.
/s/ William B. Fischer Vice President, Finance and February 14, 1997
- ------------------------- Principal Financial Officer and
William B. Fischer Accounting Officer
/s/ Paul A. Biddelman Director February 14, 1997
- -------------------------
Paul A. Biddelman
/s/ David Diamond Director February 14, 1997
- -------------------------
David Diamond
/s/ Norton Garfinkle Director February 14, 1997
- -------------------------
Norton Garfinkle
/s/ George B. Weathersby Director February 14, 1997
- -------------------------
George B. Weathersby
/s/ Donald E. Zilkha Director February 14 , 1997
- -------------------------
Donald E. Zilkha
</TABLE>
II-6
<PAGE> 122
EXHIBIT INDEX
<TABLE>
<CAPTION>
EXHIBIT
NUMBER DESCRIPTION
------ -----------
<S> <C>
1.1 Purchase Agreement dated as of January 20, 1997 between the
Company and the Initial Purchasers.
3.1 Certificate of Incorporation of the Company, together with all
amendments thereto.
3.2 By-laws of the Company, together with all amendments thereto.
4.1 Indenture, dated as of January 24, 1997, between the Company
and United States Trust Company of New York (the "Trustee").
4.2 Form of Note (contained in Indenture filed as Exhibit 4.1).
4.3 Registration Rights Agreement dated as of January 20, 1997
between the Company and the Initial Purchasers.
5.1* Opinion of Krugman, Chapnick & Grimshaw as to the legality of
the securities being registered hereunder.
10.1 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Principal Subsidiary, Norton Garfinkle, The
G/N Garfinkle Trust, Bruce F. Failing, Jr., The Failing Trust,
Elizabeth Z. Failing, Robert D. Power and John Stevens
(incorporated by reference to Exhibit 10.1 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.2 Form of Registration Rights Agreement dated March 12, 1993
among the Company, Norton Garfinkle, The G/N Garfinkle Trust,
Bruce F. Failing, Jr., The Failing Trust, Elizabeth Z.
Failing, Robert D. Power and John Stevens (incorporated by
reference to Exhibit 10.2 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.3 Form of Restated Stockholders' Agreement dated March 12, 1993
among Norton Garfinkle, The G/N Garfinkle Trust, Bruce F.
Failing, Jr., The Failing Trust and Elizabeth Z. Failing
(incorporated by reference to Exhibit 10.3 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.4 Form of Reorganization Agreement dated March 12, 1993 among
the Company, the Partnership, the Principal Subsidiary, and
the limited partners of the Partnership (incorporated by
reference to Exhibit 10.4 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.5 Form of Registration Rights Agreement dated March 12, 1993
among the Company and the limited partners of the Partnership
(incorporated by reference to Exhibit 10.5 to the Company's
Registration Statement on Form S-1 No. 33-59486).
10.6 Subscription Agreements, each dated as of July 24, 1995,
between the Company and, respectively, Donald E. Zilkha, Bruce
F. Failing, Jr., Hanseatic Corporation and Garfinkle Limited
Partnership II (incorporated by reference to Exhibit 5(c) of
the Company's Current Report on Form 8-K dated July 24, 1995).
</TABLE>
E-1
<PAGE> 123
<TABLE>
<S> <C>
10.7 Registration Rights Agreement dated as of July 24, 1995 among
the Company, Donald E. Zilkha, Bruce F. Failing, Jr.,
Hanseatic Corporation and Garfinkle Limited Partnership II
(incorporated by reference to Exhibit 5(d) of the Company's
Current Report on Form 8-K dated July 24, 1995).
10.8 Lease dated as of June 8, 1992 between the Company (as
assignee) and Wilton Office Associates Limited Partnership
(incorporated by reference to Exhibit 10.9 to the Company's
Registration Statement on Form S-1 No. 33-59486 and
incorporated herein by reference).
10.9 Technical Services Agreement dated October 1, 1985 between
Telepanel, Inc. and Amacrine International, Inc. (incorporated
by reference to Exhibit 10.10 to the Company's Registration
Statement on Form S-1 No. 33-59486).
10.10 License Agreement dated January 27, 1993 between the Company
and Telepanel Systems, Inc. (incorporated by reference to
Exhibit 10.11 to the Company's Registration Statement on Form
S-1 No. 33-59486).
10.11 Note and Warrant Purchase Agreement dated as of August 12,
1994 among the Company, the Predecessor Corporation and the
Connecticut Development Authority (incorporated by reference
to Exhibit 10(a) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
10.12 7.4% Convertible Note dated August 12, 1994 executed by the
Company and the Principal Subsidiary to the Connecticut
Development Authority (incorporated by reference to Exhibit
10(b) to the Company's Quarterly Report on Form 10-Q for the
quarter ended June 30, 1994).
10.13 Stock Subscription Warrant dated August 12, 1994 issued by the
Company to the Connecticut Development Authority (incorporated
by reference to Exhibit 10(c) to the Company's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1994).
10.14 Conditional Assignment and Security Agreement dated August 12,
1994 among the Company, the Principal Subsidiary and the
Connecticut Development Authority (incorporated by reference
to Exhibit 10(d) to the Company's Quarterly Report on Form
10-Q for the quarter ended June 30, 1994).
10.15 Revolving Credit Loan Agreement dated as of March 30, 1995
between the Company and the lenders named in Annex 1
(incorporated by reference to Exhibit 10.15 to the Company's
Annual Report on Form 10-K for the year ended December 31,
1994).
10.16 Placing Agreement dated July 5, 1996 between the Company and
Henderson Crosthwaite Institutional Brokers Limited
(incorporated by reference to Exhibit 5(c) to the Company's
Current Report on Form 8-K dated July 11, 1996).
10.17 Agreement with respect to U.S. Securities Laws dated July 2,
1996 between the Company and Henderson Crosthwaite
Institutional Brokers Limited (incorporated by reference to
Exhibit 5(d) to the Company's Current Report on Form 8-K dated
July 11, 1996).
10.18 Forms of Subscription Agreement accepted July 5, 1996 by the
Company (incorporated by reference to Exhibit 5(f) to the
Company's Current Report on Form 8-K dated July 11, 1996).
</TABLE>
E-2
<PAGE> 124
<TABLE>
<S> <C>
10.19 Registration Rights Agreement dated July 11, 1996 between the
Company and the subscribers parties thereto (incorporated by
reference to Exhibit 5(g) to the Company's Current Report on
Form 8-K dated July 11, 1996).
10.20 Warrant Agreement dated as of January 24, 1997, between the
Company and American Stock Transfer & Trust Company.
10.21 Promissory Note dated October 7, 1992 of Paul M. Patrick in
favor of the Company (incorporated by reference to Exhibit
10.12 to the Company's Registration Statement on Form S-1 No.
33-59486).
10.22 Electronic Retailing Systems International, Inc. 1993 Employee
Stock Option Plan.
10.23 Electronic Retailing Systems International, Inc. 1993 Director
Stock Option Plan.
11.1 Statement of Computation of Per Share Earnings (incorporated
by reference to Exhibit 11 to the Company's Quarterly Report
on Form 10-Q for the quarter ended September 30, 1996, as
amended).
12.1 Statement of Computation of Ratio of Earnings to Fixed
Charges.
15.1 Letter from Price Waterhouse LLP re unaudited interim
financial information.
21.1 Subsidiaries of the Company (incorporated by reference to
Exhibit 21 to the Company's Annual Report on Form 10-K for the
year ended December 31, 1995).
23.1 Consent of Price Waterhouse LLP.
23.2* Consent of Krugman, Chapnick & Grimshaw.
24.1 Power of Attorney (appearing on Signature Page).
25.1 Form T-1 Statement of Eligibility of Trustee.
27.1 Financial Data Schedule (incorporated by reference to Exhibit
27 to the Company's Quarterly Report on Form 10-Q for the
quarter ended September 30, 1996, as amended).
99.1 Form of Letter of Transmittal.
99.2 Form of Notice of Guaranteed Delivery.
</TABLE>
- -----------------
* To be filed by amendment.
E-3
<PAGE> 1
EXHIBIT 1.1
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
$147,312,000 Representing 147,312 Units
Consisting of
13 1/4% Senior Discount Notes Due 2004
and Warrants to Purchase
2,538,258 Shares of Common Stock
PURCHASE AGREEMENT
January 20, 1997
Credit Suisse First Boston Corporation
UBS Securities LLC
In care of Credit Suisse First Boston Corporation
As Representative of the Several Initial Purchasers
11 Madison Avenue
New York, New York 10010
Ladies and Gentlemen:
Electronic Retailing Systems International, Inc., a Delaware
corporation (the "Company"), proposes, subject to the terms and conditions
stated herein, to issue and sell to Credit Suisse First Boston Corporation and
UBS Securities LLC (collectively, the "Initial Purchasers") 147,312 units (the
"Units"), each consisting of 13 1/4% Senior Discount Notes Due 2004 with a
principal amount at maturity of $1,000 (collectively, the "Notes") and one
warrant (collectively, the "Warrants") to purchase 17.23 shares of the common
stock, par value $.01 per share, of the Company ("Common Stock"). The Notes will
be issued pursuant to an indenture dated as of January 24, 1997 (the
"Indenture"), between the Company and United States Trust Company of New York,
as trustee (in such capacity, the "Trustee"). The Warrants will be issued
pursuant to a warrant agreement (the "Warrant Agreement") dated as of January
24, 1997, between the Company and American Stock Transfer & Trust Company, as
warrant agent (in such capacity, the "Warrant Agent"). The Units, Notes and
Warrants are referred to herein collectively as the "Offered Securities".
Holders (including subsequent transferees) of the Notes will
have the registration rights set forth in the Registration Rights Agreement of
even date herewith (the
<PAGE> 2
2
"Registration Rights Agreement"), between the Company and the Initial
Purchasers. Pursuant to the Registration Rights Agreement, the Company has
agreed to file with the Securities and Exchange Commission (the "Commission")
(i) a registration statement (the "Exchange Offer Registration Statement") under
the Securities Act of 1933, as amended (the "Securities Act"), registering an
issue of a series of senior discount notes (the "Exchange Notes") identical in
all material respects to the Notes (except that the Exchange Notes will not
contain terms with respect to transfer restrictions) to be offered in exchange
for the Notes (the "Exchange Offer") and (ii) under certain circumstances, a
shelf registration statement pursuant to Rule 415 under the Securities Act (the
"Shelf Registration Statement").
This Agreement, the Indenture, the Warrant Agreement and the
Registration Rights Agreement are referred to herein collectively as the
"Operative Documents".
The Company hereby agrees with the several Initial Purchasers
as follows:
1. Representations and Warranties of the Company. The Company
represents and warrants to, and agrees with, the several Initial Purchasers
that:
a. A preliminary offering circular and an offering circular
relating to the Offered Securities to be offered by the Initial
Purchasers have been prepared by the Company. Such preliminary offering
circular and offering circular, as supplemented as of the date of this
Agreement, and any other document approved by the Company for use in
connection with the contemplated resale of the Offered Securities, are
hereinafter collectively referred to as the "Offering Document". On the
date of this Agreement, the Offering Document does not include any
untrue statement of a material fact or omit to state any material fact
necessary in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading. The preceding
sentence does not apply to statements in or omissions from the Offering
Document based upon written information furnished to the Company by any
Initial Purchaser through Credit Suisse First Boston Corporation
("CSFBC") specifically for use therein, it being understood and agreed
that the only such information is that described as such in Section
6(b) hereof.
<PAGE> 3
3
b. The Company has been duly incorporated and is an existing
corporation in good standing under the laws of the State of Delaware,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Offering Document; and the
Company is duly qualified to do business as a foreign corporation in
good standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification, except where the failure to so qualify would not
individually or in the aggregate have a material adverse effect on the
Company and its subsidiaries taken as a whole.
c. Each significant subsidiary of the Company (as defined in
Regulation S-X of the Securities Exchange Act of 1934 (the "Exchange
Act")) has been duly incorporated and is an existing corporation in
good standing under the laws of the jurisdiction of its incorporation,
with power and authority (corporate and other) to own its properties
and conduct its business as described in the Offering Document; each
significant subsidiary of the Company is duly qualified to do business
as a foreign corporation in good standing in all other jurisdictions in
which its ownership or lease of property or the conduct of its business
requires such qualification, except where the failure to so qualify
would not individually or in the aggregate have a material adverse
effect on the Company and its subsidiaries taken as a whole; all of the
issued and outstanding capital stock of each significant subsidiary of
the Company has been duly authorized and validly issued and is fully
paid and nonassessable; and the capital stock of each significant
subsidiary owned by the Company, directly or through subsidiaries, is
owned (except as disclosed in the Offering Document) free from liens,
encumbrances and defects.
d. The Indenture and the Warrant Agreement have been duly
authorized by the Company; the Offered Securities have been duly
authorized by the Company; and when the Offered Securities are
delivered and paid for pursuant to this Agreement on the Closing Date
(as defined below), the Indenture and the Warrant Agreement will have
been duly executed and delivered by the Company, such Offered
Securities will have been duly executed, authenticated, issued and
delivered by the Company or the Trustee, as applicable, and will
conform
<PAGE> 4
4
in all material respects to the description thereof contained in the
Offering Document, and the Indenture, the Warrant Agreement and such
Offered Securities will constitute valid and legally binding
obligations of the Company, enforceable in accordance with their terms,
subject to bankruptcy, insolvency, fraudulent transfer, reorganization,
moratorium and similar laws of general applicability relating to or
affecting creditors' rights and to general principles of equity.
e. The Registration Rights Agreement has been duly authorized,
executed and delivered by the Company and conforms in all material
respects to the description thereof contained in the Offering Document.
The Registration Rights Agreement constitutes a valid and legally
binding obligation of the Company and is enforceable in accordance with
its terms, subject to bankruptcy, insolvency, fraudulent transfer,
reorganization, moratorium and similar laws of general applicability
relating to or affecting creditors' rights and to general principles of
equity.
f. When the Offered Securities are delivered and paid for
pursuant to this Agreement on the Closing Date, the Warrants will be
convertible into the shares of Common Stock ("Underlying Shares") of
the Company in accordance with their terms; the Underlying Shares
initially issuable upon conversion of such Warrants have been duly
authorized and reserved for issuance upon such conversion and, when
issued upon such conversion, will be validly issued, fully paid and
nonassessable; the outstanding Common Stock has been duly authorized
and validly issued, is fully paid and nonassessable and conforms in all
material respects to the description thereof contained in the Offering
Document; and the stockholders of the Company have no preemptive rights
with respect to the Offered Securities or the Underlying Shares.
g. To the Company's knowledge as of the date of this
Agreement, no consent, approval, authorization, or order of, or filing
with, any governmental agency or body or any court is required for the
consummation by the Company of the transactions contemplated by the
Operative Documents or in connection with the issuance and sale of the
Offered Securities, except as may be required under the Securities Act
with respect to the
<PAGE> 5
5
Registration Rights Agreement and the transactions contemplated
thereunder.
h. The execution, delivery and performance by the Company of
the Operative Documents, and the issuance and sale of the Offered
Securities and compliance with the terms and provisions thereof, will
not result in a breach or violation of any of the terms and provisions
of, or constitute a default under, any statute, rule, regulation or
order of any governmental agency or body or any court, domestic or
foreign, having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or instrument to
which the Company or any such subsidiary is a party or by which the
Company or any such subsidiary is bound or to which any of the
properties of the Company or any such subsidiary is subject except for
such breaches, violations or defaults that would not individually or in
the aggregate result in a material adverse effect on the Company and
its subsidiaries taken as a whole, or the charter or by-laws of the
Company or any such subsidiary, and the Company has full power and
authority to authorize, issue and sell the Offered Securities as
contemplated by this Agreement.
i. This Agreement has been duly authorized, executed and
delivered by the Company.
j. The Company and its subsidiaries have good and marketable
title to all real properties and all other properties and assets owned
by them, in each case (except as disclosed in the Offering Document)
free from liens, encumbrances and defects except for such liens,
encumbrances or defects which would not individually or in the
aggregate have a material adverse effect on the Company and its
subsidiaries taken as a whole; and the Company and its subsidiaries
hold any leased real or personal property under valid and enforceable
leases with only such exceptions as would not individually or in the
aggregate have a material adverse effect on the Company and its
subsidiaries.
k. The Company and its subsidiaries (i) possess adequate
certificates, authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now operated by
them except for such certificates, authorities or permits the failure
<PAGE> 6
6
to possess which would not individually or in the aggregate have a
material adverse effect on the Company and its subsidiaries taken as a
whole and (ii) have not received any notice of proceedings relating to
the revocation or modification of any such certificate, authority or
permit that is reasonably likely to individually or in the aggregate
have a material adverse effect on the Company and its subsidiaries
taken as a whole.
l. No labor dispute with the employees of the Company or any
subsidiary exists or, to the knowledge of the Company, is imminent that
is reasonably likely to have a material adverse effect on the Company
and its subsidiaries taken as a whole.
m. The Company and its subsidiaries own, possess or can
acquire on reasonable terms adequate trademarks, trade names and other
rights to inventions, know-how, patents, copyrights, confidential
information and other intellectual property (collectively,
"intellectual property rights") necessary to conduct the business now
operated by them, or presently employed by them with such exceptions as
do not individually or in the aggregate have a material adverse effect
on the Company and its subsidiaries taken as a whole, and (except as
disclosed in the Offering Document) have not received any notice of
infringement of or conflict with asserted rights of others with respect
to any intellectual property rights that is reasonably likely
individually or in the aggregate to have a material adverse effect on
the Company and its subsidiaries taken as a whole.
n. Except as disclosed in the Offering Document, neither the
Company nor any of its subsidiaries is in violation of any statute,
rule, regulation, decision or order of any governmental agency or body
or any court, domestic or foreign, relating to the use, disposal or
release of hazardous or toxic substances or relating to the protection
or restoration of the environment or human exposure to hazardous or
toxic substances (collectively, "environmental laws"), owns or operates
any real property contaminated with any substance that is subject to
any environmental laws, is liable for any off-site disposal or
contamination pursuant to any environmental laws, or is subject to any
claim relating to any environmental laws, which violation,
contamination, liability or claim would individually or
<PAGE> 7
7
in the aggregate have a material adverse effect on the Company and such
subsidiaries taken as a whole; and the Company is not aware of any
pending investigation which is reasonably likely to lead to such a
claim.
o. Except as disclosed in the Offering Document, there are no
pending actions, suits or proceedings against or affecting the Company,
any of its subsidiaries or any of their respective properties that are
reasonably likely to individually or in the aggregate have a material
adverse effect on the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole, or would materially and adversely affect the ability
of the Company to perform its obligations under the Operative
Documents, or which are otherwise material in the context of the sale
of the Offered Securities; and no such actions, suits or proceedings
are, to the Company's knowledge, threatened or contemplated.
p. The financial statements included in the Offering Document
present fairly in all material respects the financial position of the
Company and its consolidated subsidiaries as of the dates shown and
their results of operations and cash flows for the periods shown, and
such financial statements have been prepared in conformity with the
generally accepted accounting principles in the United States applied
on a consistent basis except as otherwise specified therein.
q. Since the date of the latest audited financial statements
included in the Offering Document, except as disclosed in the Offering
Document, there has been no material adverse change, nor any
development or event involving a prospective material adverse change,
in the condition (financial or other), business, properties or results
of operations of the Company and its subsidiaries taken as a whole and,
except as disclosed in the Offering Document, there has been no
dividend or distribution of any kind declared, paid or made by the
Company on any class of its capital stock.
r. The Company has applied for an order under Section 3(b)(2)
of the Investment Company Act of 1940 (the "Investment Company Act")
declaring that it is not an investment company by virtue of the fact
that it is primarily engaged in a business other than that of
<PAGE> 8
8
investing, reinvesting, owning, holding or trading in securities or,
alternatively, for an order under Section 6(c) of the Investment
Company Act exempting it from all provisions of the Investment Company
Act. The Company is not, and after giving effect to the offering and
sale of the Offered Securities and the application of the proceeds
thereof as described in the Offering Document, will not be, required to
register as an investment company under the Investment Company Act
(whether as an open-end investment company, unit investment trust or
face-amount certificate company or closed-end investment company);
provided, however, that the Company makes no representation as to its
status under the Investment Company Act following the expiration of the
60 day exemption provided for in Section 3(b)(2) of the Investment
Company Act, which will terminate on March 15, 1997, unless extended by
the Securities and Exchange Commission.
s. No securities of the same class (within the meaning of Rule
144A(d)(3) under the Securities Act) as any of the Offered Securities
are listed on any national securities exchange registered under Section
6 of the Exchange Act or quoted in a U.S. automated interdealer
quotation system.
t. Assuming the accuracy of the representations and warranties
and compliance with the covenants of the Initial Purchasers in Section
3 hereof, the offer and sale of the Offered Securities in the manner
contemplated by this Agreement will be exempt from the registration
requirements of the Securities Act by reason of Section 4(2) thereof
and Regulation S thereunder ("Regulation S"); and it is not necessary
to qualify an indenture in respect of the Offered Securities under the
United States Trust Indenture Act of 1939, as amended (the "Trust
Indenture Act").
u. None of the Company, any of its directors, or any person
acting on its or their behalf (other than the Initial Purchasers) (i)
has, within the six-month period prior to the date hereof, offered or
sold in the United States or to any U.S. person (as such terms are
defined in Regulation S) any of the Offered Securities, any security of
the same class or series (within the meaning of Rule 144A(d)(3) under
the Securities Act) as any of the Offered Securities or any depositary
shares representing the right to receive any such securities
<PAGE> 9
9
or (ii) has offered or will offer or sell the Offered Securities (A) in
the United States by means of any form of general solicitation or
general advertising within the meaning of Rule 502(c) under the
Securities Act or (B) with respect to any such securities sold in
reliance on Rule 903 of Regulation S, by means of any directed selling
efforts within the meaning of Rule 902(b) of Regulation S. The Company,
its directors and any person acting on its or their behalf have
complied and will comply with the offering restrictions requirements of
Regulation S. The Company has not entered and will not enter into any
contractual arrangement with respect to the distribution of the Offered
Securities except for this Agreement and the Registration Rights
Agreement.
v. The Company is subject to Section 13 or 15(d) of the
Exchange Act.
w. The proceeds to the Company from the offering of the
Offered Securities will be used as contemplated in the Offering
Document.
2. Purchase, Sale and Delivery of Offered Securities. On the
basis of the representations, warranties and agreements herein contained, but
subject to the terms and conditions herein set forth, the Company agrees to sell
to the Initial Purchasers, and the Initial Purchasers agree, severally and not
jointly, to purchase from the Company the respective number of Units set forth
opposite the names of the several Initial Purchasers on Schedule A hereto at a
purchase price of $678.83 per Unit.
The Company will deliver against payment of the purchase price
the Offered Securities in the form of one or more permanent global Securities in
definitive form (the "Global Securities") deposited with the Trustee as
custodian for The Depository Trust Company ("DTC") and registered in the name of
Cede & Co., as nominee for DTC. Interests in any permanent global Securities
will be held only in book-entry form through DTC, except in the limited
circumstances described in the Offering Document. Payment for the Offered
Securities shall be made by the Initial Purchasers in Federal (same-day) funds
by official check or checks (or wire transfer to an account in New York
previously designated to CSFBC by the Company at a bank acceptable to CSFBC)
drawn to the order of the Company at the office of Cravath, Swaine & Moore at
10:00 a.m. (New
<PAGE> 10
10
York time) on January 24, 1997, or at such other time not later than seven full
business days thereafter as CSFBC and the Company determine, such time being
herein referred to as the "Closing Date", against delivery to the Trustee as
custodian for DTC of the Global Securities representing all of the Securities.
The Global Securities will be made available for checking at the office of the
Trustee at least 24 hours prior to the Closing Date.
3. Representations by Initial Purchasers; Resale by Initial
Purchasers. a. Each Initial Purchaser severally represents and warrants to the
Company that it is an "accredited investor" within the meaning of Regulation D
under the Securities Act.
b. Each Initial Purchaser severally acknowledges that the
Offered Securities have not been registered under the Securities Act
and may not be offered or sold within the United States or to, or for
the account or benefit of, U.S. persons except in accordance with
Regulation S or pursuant to an exemption from the registration
requirements of the Securities Act. Each Initial Purchaser severally
represents and agrees that it has offered and sold the Offered
Securities, and will offer and sell the Offered Securities only in
accordance with Rule 903 or Rule 144A under the Securities Act ("Rule
144A") or, in the case of CSFBC or any other Initial Purchaser
authorized by CSFBC, to a limited number of Institutional Accredited
Investors (as hereinafter defined) in accordance with subsection (c).
Accordingly, neither such Initial Purchaser nor any of its affiliates,
nor any person acting on its or their behalf, has engaged or will
engage in any directed selling efforts with respect to the Offered
Securities, and such Initial Purchaser, its affiliates and all persons
acting on its or their behalf have complied and will comply with the
offering restrictions requirement of Regulation S and any applicable
foreign securities laws, regulations or restrictions, in connection
with the offering of the Offered Securities outside the United States.
Terms used in this subsection (b) have the meanings given to them by
Regulation S.
c. CSFBC and any other Initial Purchaser authorized by CSFBC
may offer and sell Offered Securities in definitive, fully registered
form to a limited number of institutions, each of which is
<PAGE> 11
11
reasonably believed by the applicable Initial Purchaser to be an
"accredited investor" within the meaning of Rule 501(a)(1), (2), (3) or
(7) under the Securities Act or an entity in which all of the equity
owners are accredited investors within the meaning of Rule 501(a)(1),
(2), (3) or (7) under the Securities Act (each, an "Institutional
Accredited Investor"); provided, however, that each such Institutional
Accredited Investor executes and delivers to such Initial Purchaser and
the Company, prior to the consummation of any sale of Offered
Securities to such Institutional Accredited Investor, an Accredited
Investor Letter in substantially the form attached as Annex A to the
Offering Document (an "Accredited Investor Letter").
d. Each Initial Purchaser severally agrees that it and each of
its affiliates has not entered and will not enter into any contractual
arrangement with respect to the distribution of the Offered Securities
except for any such arrangements with the other Initial Purchasers or
affiliates of the other Initial Purchasers or with the prior written
consent of the Company.
e. Each Initial Purchaser severally agrees that it and each of
its affiliates will not offer or sell the Offered Securities in the
United States by means of any form of general solicitation or general
advertising within the meaning of Rule 502(c) under the Securities Act,
including, but not limited to (i) any advertisement, article, notice or
other communication published in any newspaper, magazine or similar
media or broadcast over television or radio or (ii) any seminar or
meeting whose attendees have been invited by any general solicitation
or general advertising. Each Initial Purchaser severally agrees, with
respect to resales made in reliance on Rule 144A of any of the Offered
Securities, to deliver either with the confirmation of such resale or
otherwise prior to settlement of such resale a notice to the effect
that the resale of such Offered Securities has been made in reliance
upon the exemption from the registration requirements of the Securities
Act provided by Rule 144A.
f. Each of the Initial Purchasers severally represents and
agrees that (i) it has not offered or
<PAGE> 12
12
sold, and will not offer or sell, in the United Kingdom, by means of
any document, any Offered Securities other than to persons whose
ordinary business it is to buy or sell shares or debentures, whether as
a principal or agent, or in circumstances which do not constitute an
offer to the public within the meaning of the Public Offers of
Securities Regulations 1995, (ii) it has complied and will comply with
all applicable provisions of the Financial Services Act 1986 with
respect to anything done by it in relation to the Offered Securities
in, from or otherwise involving the United Kingdom and (iii) it has
only issued or passed on and will only issue or pass on in the United
Kingdom any document received by it in connection with the issue of the
Offered Securities to a person who is of a kind described in Article
11(3) of the Financial Services Act 1986 (Investment Advertisements)
(Exemptions) Order 1995 or is a person to whom the document may
otherwise lawfully be issued or passed on.
4. Certain Agreements of the Company. The Company agrees with
the several Initial Purchasers that:
a. The Company will advise CSFBC promptly of any proposal to
amend or supplement the Offering Document and will not effect such
amendment or supplementation without CSFBC's consent, which consent
shall not be unreasonably withheld or delayed. If, at any time prior to
the completion of the resale of the Offered Securities by the Initial
Purchasers, any event occurs as a result of which the Offering Document
as then amended or supplemented would include an untrue statement of a
material fact or omit to state any material fact necessary in order to
make the statements therein, in the light of the circumstances under
which they were made, not misleading, the Company promptly will notify
CSFBC of such event and promptly will prepare, at its own expense, an
amendment or supplement which will correct such statement or omission.
Neither CSFBC's consent to, nor the Initial Purchasers' delivery to
offerees or investors of, any such amendment or supplement shall
constitute a waiver of any of the conditions set forth in Section 5.
b. The Company will furnish to CSFBC copies of any preliminary
offering circular, the Offering Document and all amendments and
supplements to such
<PAGE> 13
13
documents, in each case as soon as available and in such quantities as
CSFBC reasonably requests, and the Company will furnish to CSFBC on the
business day following the date hereof three copies of the Offering
Circular (as defined below) signed by a duly authorized officer of the
Company, one of which will include the independent accountants' reports
therein manually signed by such independent accountants. At any time
when the Company is not subject to Section 13 or 15(d) of the Exchange
Act, for so long as any Offered Securities are outstanding, the Company
will promptly furnish or cause to be furnished to CSFBC (and, upon
request, to each of the other Initial Purchasers) and, upon request of
holders and prospective purchasers of the Offered Securities, to such
holders and purchasers, copies of the information required to be
delivered to holders and prospective purchasers of the Offered
Securities pursuant to Rule 144A(d)(4) under the Securities Act (or any
successor provision thereto) in order to permit compliance with Rule
144A in connection with resales by such holders of the Offered
Securities. The Company will pay the expenses of printing and
distributing to the Initial Purchasers all such documents.
c. The Company will arrange for the qualification of the
Offered Securities for sale and the determination of their eligibility
for investment under the laws of such jurisdictions in the United
States and Canada as CSFBC shall reasonably designate and will continue
such qualifications in effect so long as required for the resale of the
Offered Securities by the Initial Purchasers; provided that the Company
will not be required to qualify as a foreign corporation or to file a
general consent to service of process in any such jurisdiction.
d. During the lesser of (i) the period of seven years after
the Closing Date and (ii) for so long as any Offered Securities are
outstanding, the Company will furnish to CSFBC and, upon request, to
each of the other Initial Purchasers, as soon as practicable after the
end of each fiscal year, a copy of its annual report to shareholders
for such year; and the Company will furnish to CSFBC and, upon request,
to each of the other Initial Purchasers (i) as soon as available, a
copy of each report and any definitive proxy statement of the Company
filed with the Commission under the
<PAGE> 14
14
Exchange Act or mailed to shareholders and (ii) from time to time, such
other information concerning the Company as CSFBC may reasonably
request.
e. During the period of three years after the Closing Date or,
if earlier, until such time as the Offered Securities are no longer
restricted securities (as defined in Rule 144 of the Securities Act),
the Company will, upon request, furnish each of the Initial Purchasers
and any holder of Offered Securities a copy of the restrictions on
transfer applicable to the Offered Securities.
f. During the period of three years after the Closing Date,
the Company will not, and will not permit any of its directors to,
resell any of the Offered Securities that have been reacquired by any
of them.
g. The Company has applied for an order under Section 3(b)(2)
of the Investment Company Act declaring that it is not an investment
company by virtue of the fact that it is primarily engaged in a
business other than that of investing, reinvesting, owning, holding or
trading in securities or, alternatively, for an order under Section
6(c) of the Investment Company Act exempting it from all provisions of
the Investment Company Act. In the event such an order is not granted,
the Company will take such action consistent with the Indenture as may
be prudent to seek to avoid becoming subject to regulation under the
Investment Company Act; however, there is no assurance that under such
circumstances such regulation could be avoided.
h. The Company will pay all expenses incidental to the
performance of its obligations under the Operative Documents, including
(i) the fees and expenses of the Trustee and the Warrant Agent, and the
professional advisers of each; (ii) all expenses in connection with the
execution, issue, authentication, packaging and initial delivery of the
Offered Securities, the preparation and printing of the Operative
Documents, the Offered Securities, the Offering Document and amendments
and supplements thereto, and any other document relating to the
issuance, offer, sale and delivery of the Offered Securities; and (iii)
the cost of qualifying the Offered Securities for trading in the
Private Offerings, Resale and Trading through Automated
<PAGE> 15
15
Linkages (PORTAL) market and any expenses incidental thereto. The
Company will also pay or reimburse the Initial Purchasers (to the
extent incurred by them) for any reasonable expenses (including
reasonable fees and disbursements of counsel) incurred in connection
with qualification of the Offered Securities for sale under the laws of
such jurisdictions in the United States and Canada as CSFBC reasonably
designates and the printing of memoranda relating thereto, if any, for
all travel expenses of the Initial Purchasers and the Company's
officers and employees and any other expenses of the Initial Purchasers
and the Company in connection with attending or hosting meetings with
prospective purchasers of the Offered Securities from the Initial
Purchasers and for expenses incurred in distributing preliminary
offering circulars and the Offering Document (including any amendments
and supplements thereto).
i. In connection with the offering, until CSFBC shall have
notified the Company and the other Initial Purchaser of the completion
of the resale of the Offered Securities, neither the Company nor any of
its directors has or will, either alone or with one or more other
persons, bid for or purchase for any account in which it or any of its
directors has a beneficial interest any Offered Securities or the
Common Stock or attempt to induce any person to purchase any Offered
Securities for the purpose of creating actual, or apparent, active
trading in, or of raising the price of, the Offered Securities.
j. For a period of 150 days after the date of the initial
offering of the Offered Securities by the Initial Purchasers, neither
the Company nor any of its subsidiaries will offer, sell, contract to
sell, pledge or otherwise dispose of, directly or indirectly, any
United States dollar denominated debt securities issued or guaranteed
by the Company or any such subsidiary and having a maturity of more
than one year from the date of issue (other than the Offered Securities
or in connection with the Exchange Offer or the Shelf Registration
Statement and other than in connection with the creation of a Joint
Venture (as defined in the Indenture)). The Company will not at any
time offer, sell, contract to sell, pledge or otherwise dispose of,
directly or indirectly, any securities under circumstances where such
offer, sale, pledge, contract
<PAGE> 16
16
or disposition would cause the exemption afforded by Section 4(2) of
the Securities Act or the safe harbor of Regulation S thereunder to
cease to be applicable to the offer and sale of the Offered Securities.
k. The Company will use its reasonable best efforts to cause
the Offered Securities to be eligible for trading on the PORTAL trading
system of the National Association of Securities Dealers, Inc. upon
issuance.
5. Conditions of the Obligations of the Initial Purchasers.
The obligations of the several Initial Purchasers to purchase and pay for the
Offered Securities will be subject to the accuracy of the representations and
warranties on the part of the Company herein, to the accuracy of the statements
of officers of the Company made pursuant to the provisions hereof, to the
performance by the Company of its obligations hereunder and to the following
additional conditions precedent:
a. The Initial Purchasers shall have received a letter, dated
the date of this Agreement, of Price Waterhouse LLP ("PW") confirming
that they are independent accountants within the meaning of the
Securities Act and the applicable published rules and regulations
thereunder ("Rules and Regulations") and to the effect that:
(i) the consolidated financial statements
examined by them and included in the Offering
Document comply as to form in all material respects
with the applicable accounting requirements of the
Securities Act and the related published Rules and
Regulations;
(ii) on the basis of a reading of the latest
available interim consolidated financial statements
of the Company, inquiries of officials of the Company
who have responsibility for financial and accounting
matters and other specified procedures, nothing came
to their attention that caused them to believe that:
(A) the unaudited consolidated
financial statements included in the
<PAGE> 17
17
Offering Document do not comply as to form in
all material respects with the applicable
accounting requirements of the Securities Act
and the related published Rules and
Regulations or any material modifications
should be made to such unaudited consolidated
financial statement for them to be in
conformity with generally accepted accounting
principles;
(B) at the date of the latest
available consolidated balance sheet read by
PW, or at a subsequent specified date not more
than five business days prior to the date of
this Agreement, there was any change in the
capital stock or any increase in short-term
indebtedness or long-term debt of the Company
and its consolidated subsidiaries or, at the
date of the latest available balance sheet
read by PW, there was any decrease in
consolidated net current assets or net assets,
as compared with amounts shown on the latest
unaudited consolidated balance sheet included
in the Offering Document; or
(C) for the period of the closing
date of the latest unaudited consolidated
statement of operations included in the
Offering Document to the closing date of the
latest available unaudited consolidated
statement of operations read by PW there were
any decreases, as compared with the
corresponding period of the previous year, in
consolidated net revenue, net operating income
or in the ratio of earnings to fixed charges;
except in all cases as set forth in clauses (B) and
(C) above for changes, increases or decreases which
are described in such letter; and
<PAGE> 18
18
(iii) they have compared specified dollar
amounts (or percentages derived from such dollar
amounts) and other financial information contained in
the Offering Document (in each case to the extent
that such dollar amounts, percentages and other
financial information are derived from the general
accounting records of the Company and its
subsidiaries subject to the internal controls of the
Company's accounting system or are derived directly
from such records by analysis or computation) with
the results obtained from inquiries, a reading of
such general accounting records and other procedures
specified in such letter and have found such dollar
amounts, percentages and other financial information
to be in agreement with such results, except as
otherwise specified in such letter.
b. Subsequent to the execution and delivery of this Agreement,
there shall not have occurred (i) a change in U.S. or international
financial, political or economic conditions or currency exchange rates
or exchange controls that would, in the reasonable judgment of CSFBC,
be likely to prejudice materially the success of the proposed issue,
sale or distribution of the Offered Securities, whether in the primary
market or in respect of dealings in the secondary market, or (ii)(A)
any change, or any development or event involving a prospective change,
in the condition (financial or other), business, properties or results
of operations of the Company or its subsidiaries which, in the
reasonable judgment of a majority in interest of the Initial
Purchasers, including CSFBC, is material and adverse and makes it
impractical or inadvisable to proceed with completion of the offering
or the sale of and payment for the Offered Securities; (B) any
suspension or limitation of trading in securities generally on the New
York Stock Exchange, or any setting of minimum prices for trading on
such exchange, or any suspension of trading of any securities of the
Company on any exchange or in the over-the-counter market; (C) any
banking moratorium declared by U.S. Federal or New York authorities; or
(D) any outbreak or escalation of major hostilities in which the United
States is involved, any declaration of war by Congress or any other
substantial national or international
<PAGE> 19
19
calamity or emergency if, in the reasonable judgment of a majority in
interest of the Initial Purchasers, including CSFBC, the effect of any
such outbreak, escalation, declaration, calamity or emergency makes it
impractical or inadvisable to proceed with completion of the offering
or sale of and payment for the Offered Securities.
c. (i) The Initial Purchasers shall have received an opinion,
dated the Closing Date, of Krugman, Chapnick & Grimshaw, counsel for
the Company, to the effect that:
(A) as of the Closing Date, such counsel have no reason
to believe the Company's offering circular dated January 21,
1997 (the "Offering Circular") contained any untrue statement
of a material fact or omitted to state any material fact
required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under
which they were made, not misleading; the descriptions in the
Offering Circular of legal and governmental proceedings and
contracts are accurate in all material respects and in all
material respects fairly describe such items (it being
understood that such counsel need express no opinion as to the
financial statements or other financial data contained in the
Offering Document);
(B) the Company has been duly incorporated and is an
existing corporation in good standing under the laws of the
State of Delaware, with power and authority (corporate and
other) to own its properties and conduct its business as
described in the Offering Document; and the Company is duly
qualified to do business as a foreign corporation in good
standing in all other jurisdictions in which its ownership or
lease of property or the conduct of its business requires such
qualification, except where the failure to so qualify would
not individually or in the aggregate have a material adverse
effect on the Company and its subsidiaries taken as a whole;
(C) the Principal Subsidiary (as defined in the Offering
Document) has been duly incorporated and is an existing
corporation in
<PAGE> 20
20
good standing under the laws of the jurisdiction of its
incorporation, with power and authority (corporate and other)
to own its properties and conduct its business as described in
the Offering Document; and such subsidiary is duly qualified
to do business as a foreign corporation in good standing in
all other jurisdictions in which its ownership or lease of
property or the conduct of its business requires such
qualification, except where the failure to so qualify would
not individually or in the aggregate have a material adverse
effect on the Company and its subsidiaries taken as a whole;
all of the issued and outstanding capital stock of such
subsidiary has been duly authorized and validly issued and is
fully paid and nonassessable; and the capital stock of such
subsidiary owned by the Company is owned, to the best of such
counsel's knowledge, free from liens, encumbrances and defects
(except as disclosed in the Offering Document);
(D) the Indenture and the Warrant Agreement have been
duly authorized, executed and delivered by the Company; the
Offered Securities have been duly authorized, executed,
authenticated, issued and delivered and conform in all
material respects to the description thereof contained in the
Offering Document; and the Indenture, the Warrant Agreement
and such Offered Securities constitute valid and legally
binding obligations of the Company, enforceable in accordance
with their terms, subject to bankruptcy, insolvency,
fraudulent transfer, reorganization, moratorium and similar
laws of general applicability relating to or affecting
creditors' rights and to general principles of equity;
(E) the Registration Rights Agreement has been duly
authorized, executed and delivered by the Company and conforms
in all material respects to the description thereof contained
in the Offering Document, and constitutes a valid and legally
binding obligation of the Company enforceable in accordance
with its terms, subject to bankruptcy, insolvency, fraudulent
transfer, reorganization, moratorium and similar laws of
general applicability relating to or affecting
<PAGE> 21
21
creditors' rights and to general principles of equity (except
that no opinion need be expressed with respect to the
indemnification or construction provisions contained therein);
(F) the Warrants are convertible into the Underlying
Shares of the Company in accordance with their terms; the
Underlying Shares initially issuable upon conversion of such
Warrants have been duly authorized and reserved for issuance
upon such conversion and, when issued upon such conversion,
will be validly issued, fully paid and nonassessable; the
outstanding Common Stock has been duly authorized and validly
issued, is fully paid and nonassessable and conforms in all
material respects to the description thereof contained in the
Offering Document; and the stockholders of the Company have no
preemptive rights with respect to the Offered Securities or
the Underlying Shares;
(G) to such counsel's knowledge, no consent, approval,
authorization or order of, or filing with, any governmental
agency or body or any court is required for the consummation
by the Company of the transactions contemplated by the
Operative Documents or in connection with the issuance and
sale of the Offered Securities, except as may be required
under the Securities Act with respect to the Registration
Rights Agreement and the transactions contemplated thereunder;
(H) to such counsel's knowledge, the execution, delivery
and performance by the Company of the Operative Documents, and
the consummation by the Company of the transactions
contemplated thereby, will not result in a breach or violation
of any of the terms and provisions of, or constitute a default
under, any statute, rule, regulation or order of any
governmental agency or body or any court, domestic or foreign,
having jurisdiction over the Company or any subsidiary of the
Company or any of their properties, or any agreement or
instrument to which the Company or any such subsidiary is a
party or by which the Company or any such subsidiary is bound
or to which any of the properties of the Company or any such
subsidiary is subject except for such
<PAGE> 22
22
breaches, violations or defaults that would not individually
or in the aggregate result in a material adverse effect on the
Company and its subsidiaries taken as a whole, or the charter
or by-laws of the Company or any such subsidiary, and the
Company has full power and authority to authorize, issue and
sell the Offered Securities as contemplated by this Agreement;
(I) this Agreement has been duly authorized, executed
and delivered by the Company;
(J) to the knowledge of such counsel, the Company and
the Principal Subsidiary possess adequate certificates,
authorities or permits issued by appropriate governmental
agencies or bodies necessary to conduct the business now
operated by them except for such certificates, authorities or
permits failure to possess which would not, individually or in
the aggregate, have a material adverse effect on the Company
and the Principal Subsidiary taken as a whole and have not
received any notice of proceedings relating to the revocation
or modification of any such certificate, authority or permit
that are reasonably likely individually or in the aggregate to
have a material adverse effect on the Company and the
Principal Subsidiary taken as a whole; and
(K) to such counsel's knowledge, except as disclosed in
the Offering Document, there are no pending actions, suits or
proceedings against or affecting the Company, any of its
subsidiaries or any of their respective properties that are
reasonably likely individually or in the aggregate to have a
material adverse effect on the condition (financial or other),
business, properties or results of operations of the Company
and its subsidiaries taken as a whole, or would materially and
adversely affect the ability of the Company to perform its
obligations under the Operative Documents, or which are
otherwise material in the context of the sale of the Offered
Securities; and, to such counsel's knowledge, no such actions,
suits or proceedings are threatened;
Such counsel may state in such opinion that no opinion
is being expressed therein with
<PAGE> 23
23
respect to or under the Investment Company Act of 1940 or any
Blue Sky laws or the registration requirements of the
Securities Act, or any rules and regulations thereunder, or
the effects of any such provision.
(ii) The Initial Purchasers shall have received an
opinion, dated the Closing Date, of Hughes Hubbard & Reed LLP,
special counsel for the Company, to the effect that:
(A) based upon and subject to certain assumptions,
no securities of the same class (within the meaning of
Rule 144A(d)(3) under the Securities Act) as any of the
Offered Securities are listed on any national securities
exchange registered under Section 6 of the Exchange Act
or quoted in a U.S. automated interdealer quotation
system;
(B) as of the Closing Date, the statements
contained in the Offering Circular in the second
paragraph under the caption "Risk Factors--Use of
Proceeds; Investment Company Act Considerations" and in
the first sentence of the penultimate paragraph under
such caption fairly describe in all material respects
the matters discussed therein;
(C) based upon and subject to certain assumptions
and qualifications, the temporary exemption provided for
in Section 3(b)(2) of the Investment Company Act exempts
both companies that are investment companies within the
meaning of paragraph (1) of Section 3(a) of the
Investment Company Act and of paragraph (3) of Section
3(a) of the Investment Company Act and that therefore
(1) as a result of the filing of the Application for an
Order Pursuant to Section 3(b)(2) or, alternatively,
pursuant to Section 6(c) of the Investment Company Act
by the Company on January 15, 1997, the Company is not,
and after giving effect to the offering and sale of the
Offered Securities and the application of the proceeds
thereof as described in the Offering Document, will not
be, required to register
<PAGE> 24
24
as an investment company under the Investment Company
Act (whether as an open-end investment company, unit
investment trust or face-amount certificate company or
closed-end investment company) during the 60 day
exemption period provided for in Section 3(b)(2) of the
Investment Company Act and (2) the statement contained
in the Offering Document in the third sentence of the
third paragraph under the caption "Risk Factors--Use of
Proceeds; Investment Company Act Considerations" is in
all material respects an accurate description of the
effect of the filing of an application for exemption
under Section 3(b)(2) of the Investment Company Act;
provided, however, that counsel will express no opinion
as to the Company's status under the Investment Company
Act following the expiration of such exemption, which
will terminate on March 15, 1997, unless extended by the
Commission; and
(D) based upon and subject to certain assumptions,
the offer and sale of the Offered Securities in the
manner contemplated by this Agreement will be exempt
from the registration requirements of the Securities Act
by reason of Section 4(2) thereof and Regulation S; and
it is not necessary to qualify an indenture in respect
of the Offered Securities under the Trust Indenture Act.
d. The Initial Purchasers shall have received from Cravath,
Swaine & Moore, counsel for the Initial Purchasers, such opinion or
opinions, dated the Closing Date, with respect to the incorporation of
the Company, the validity of the Offered Securities, the Offering
Document, the exemption from registration for the offer and sale of the
Offered Securities by the Company to the several Initial Purchasers and
the resales by the several Initial Purchasers as contemplated hereby
and other related matters as CSFBC may require, and the Company shall
have furnished to such counsel such documents as they may reasonably
request for the purpose of enabling them to pass upon such matters.
<PAGE> 25
25
(e) The Initial Purchasers shall have received a certificate,
dated the Closing Date, of the President or any Vice President and a
principal financial or accounting officer of the Company in which such
officers, to the best of their knowledge after reasonable
investigation, shall state that the representations and warranties of
the Company in this Agreement are true and correct, that the Company
has complied with all agreements and satisfied all conditions on its
part to be performed or satisfied hereunder at or prior to the Closing
Date and that, subsequent to the date of the most recent financial
statements in the Offering Document there has been no material adverse
change, nor any development or event involving a prospective material
adverse change, in the condition (financial or other), business,
properties or results of operations of the Company and its subsidiaries
taken as a whole except as set forth in or contemplated by the Offering
Document or as described in such certificate.
(f) The Initial Purchasers shall have received a letter, dated
the Closing Date, of PW which meets the requirements of subsection (a)
of this Section, except that the specified date referred to in such
subsection will be a date not more than five business days prior to the
Closing Date for the purpose of this subsection.
The Company will furnish the Initial Purchasers with such
conformed copies of such opinions, certificates, letters and documents as the
Initial Purchasers reasonably request. CSFBC may in its sole discretion waive on
behalf of the Initial Purchasers compliance with any conditions to the
obligations of the Initial Purchasers hereunder.
6. Indemnification and Contribution. a. The Company will
indemnify and hold harmless each Initial Purchaser against any losses,
claims, damages or liabilities, joint or several, to which such Initial
Purchaser may become subject, under the Securities Act or the Exchange
Act or otherwise, insofar as such losses, claims, damages or
liabilities (or actions in respect thereof) arise out of or are based
upon any untrue statement or alleged untrue statement of any material
fact contained in the Offering Document, or any amendment or supplement
thereto, or any related preliminary offering circular or any documents
referred to therein, or arise out of or are based upon the
<PAGE> 26
26
omission or alleged omission to state therein a material fact necessary
in order to make the statements therein, in the light of the
circumstances under which they were made, not misleading and will
reimburse each Initial Purchaser for any legal or other expenses
reasonably incurred by such Initial Purchaser in connection with
investigating or defending any such loss, claim, damage, liability or
action as such expenses are incurred; provided, however, that the
Company will not be liable in any such case to the extent that any such
loss, claim, damage or liability arises out of or is based upon an
untrue statement or alleged untrue statement in or omission or alleged
omission from any of such documents in reliance upon and in conformity
with written information furnished to the Company by any Initial
Purchaser through CSFBC specifically for use therein, it being
understood and agreed that the only such information consists of the
information described as such in subsection (b) below; provided
further, however, that with respect to any untrue statement or omission
or alleged untrue statement or omission made in the preliminary
offering circular, the indemnity agreement contained in this subsection
(a) shall not inure to the benefit of any Initial Purchaser that sold
the Offered Securities to the person asserting any such losses, claims,
damages or liabilities to the extent that any such loss, claim, damage
or liability of such Initial Purchaser results from the fact that there
was not sent or given to such person, on or prior to the written
confirmation of such sale, a copy of the offering circular, as amended
and supplemented, provided that (I) the Company shall have previously
furnished copies thereof to such Initial Purchaser in accordance with
this Agreement and (II) such furnished offering circular, as amended
and supplemented, would have corrected any such untrue statement or
omission or alleged untrue statement or omission.
b. Each Initial Purchaser will severally and not jointly
indemnify and hold harmless the Company against any losses, claims,
damages or liabilities to which the Company may become subject, under
the Securities Act or the Exchange Act or otherwise, insofar as such
losses, claims, damages or liabilities (or actions in respect thereof)
arise out of or are based upon any untrue statement or alleged untrue
statement of any material fact contained in the Offering Document, or
any
<PAGE> 27
27
amendment or supplement thereto, or any related preliminary offering
circular or any documents referred to therein, or arise out of or are
based upon the omission or the alleged omission to state therein a
material fact necessary in order to make the statements therein, in
light of the circumstances under which they were made, not misleading,
but in each case only to the extent that such untrue statement or
alleged untrue statement or omission or alleged omission was made in
reliance upon and in conformity with written information furnished to
the Company by such Initial Purchaser through CSFBC specifically for
use therein, and will reimburse any legal or other expenses reasonably
incurred by the Company in connection with investigating or defending
any such loss, claim, damage, liability or action as such expenses are
incurred, it being understood and agreed that the only such information
furnished by any Initial Purchaser consists of the following
information in the Offering Document furnished on behalf of each
Initial Purchaser: the table at the bottom of the cover page concerning
the terms of the offering by the Purchasers, the legends concerning
over-allotments and stabilizing on page 5 of the Offering Document and
the table, the final two sentences of the second paragraph, the fourth
paragraph and the third sentence of the sixth paragraph under the
heading "Plan of Distribution" in the preliminary offering circular and
the offering circular.
c. Promptly after receipt by an indemnified party under this
Section of notice of the commencement of any action or proceeding
(including a governmental investigation), such indemnified party will,
if a claim in respect thereof is to be made against the indemnifying
party under subsection (a) or (b) above, notify the indemnifying party
of the commencement thereof; but the omission so to notify the
indemnifying party will not relieve it from any liability which it may
have to any indemnified party otherwise than under subsection (a) or
(b) above except to the extent that it is prejudiced or harmed in any
material respect by failure to give such prompt notice. In case any
such action is brought against any indemnified party and it notifies
the indemnifying party of the commencement thereof, the indemnifying
party will be entitled to participate therein and, to the extent that
it may wish, jointly with any other indemnifying party
<PAGE> 28
28
similarly notified, to assume the defense thereof, with one counsel
(and local counsel as necessary) reasonably satisfactory to such
indemnified party (who shall not, except with the consent of the
indemnified party, be counsel to the indemnifying party), and after
notice from the indemnifying party to such indemnified party of its
election so to assume the defense thereof, the indemnifying party will
not be liable to such indemnified party under this Section for any
legal or other expenses subsequently incurred by such indemnified party
in connection with the defense thereof other than reasonable costs of
investigation. No indemnifying party shall, without the prior written
consent of the indemnified party, not to be unreasonably withheld,
effect any settlement of any pending or threatened action in respect of
which any indemnified party is or could have been a party and indemnity
could have been sought hereunder by such indemnified party unless such
settlement includes an unconditional release of such indemnified party
from all liability on any claims that are the subject matter of such
action. No indemnifying party shall be liable for any amounts paid in
settlement of any action or claim without its written consent, which
consent shall not be unreasonably withheld.
d. If the indemnification provided for in this Section is
unavailable or insufficient to hold harmless an indemnified party under
subsection (a) or (b) above for any reason other than as provided in
subsection (c) above, then each indemnifying party shall contribute to
the amount paid or payable by such indemnified party as a result of the
losses, claims, damages or liabilities referred to in subsection (a) or
(b) above (i) in such proportion as is appropriate to reflect the
relative benefits received by the Company on the one hand and the
Initial Purchasers on the other from the offering of the Offered
Securities or (ii) if the allocation provided by clause (i) above is
not permitted by applicable law, in such proportion as is appropriate
to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the Company on the one hand and
the Initial Purchasers on the other in connection with the statements
or omissions which resulted in such losses, claims, damages or
liabilities as well as any other relevant equitable considerations. The
relative benefits received by the Company on the one hand and the
Initial
<PAGE> 29
29
Purchasers on the other shall be deemed to be in the same proportion as
the total net proceeds from the offering (before deducting expenses)
received by the Company bear to the total discounts and commissions
received by the Initial Purchasers from the Company under this
Agreement. The relative fault shall be determined by reference to,
among other things, whether the untrue or alleged untrue statement of a
material fact or the omission or alleged omission to state a material
fact relates to information supplied by the Company or the Initial
Purchasers and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such untrue statement
or omission. The amount paid by an indemnified party as a result of the
losses, claims, damages or liabilities referred to in the first
sentence of this subsection (d) shall be deemed to include any legal or
other expenses reasonably incurred by such indemnified party in
connection with investigating or defending any action or claim which is
the subject of this subsection (d). Notwithstanding the provisions of
this subsection (d), (i) no Initial Purchaser shall be required to
contribute any amount in excess of the amount by which the total price
at which the Offered Securities purchased by it were resold exceeds the
amount of any damages which such Initial Purchaser has otherwise been
required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission and (ii) no person guilty of a fraudulent
misrepresentation (within the meaning of Section 11(f) of the
Securities Act) shall be entitled to a contribution from any person who
was not guilty of such fraudulent misrepresentation. The Initial
Purchasers' obligations in this subsection (d) to contribute are
several in proportion to their respective purchase obligations and not
joint.
e. The obligations of the Company under this Section shall be
in addition to any liability which the Company may otherwise have and
shall extend, upon the same terms and conditions, to each officer,
director, employee, representative and agent of the Initial Purchasers
and to each person, if any, who controls any Initial Purchaser within
the meaning of the Securities Act or the Exchange Act; and the
obligations of the Initial Purchasers under this Section shall be in
addition to any liability which the respective Initial Purchasers may
otherwise have and shall extend, upon
<PAGE> 30
30
the same terms and conditions, to each officer, director, employee,
representative and agent of the Company and to each person, if any, who
controls the Company within the meaning of the Securities Act or the
Exchange Act.
7. Default of Initial Purchasers. If any Initial Purchaser
defaults in its obligation to purchase Offered Securities hereunder and the
aggregate number of Offered Securities that such defaulting Initial Purchaser
agreed but failed to purchase does not, together with all offered securities
failed to be purchased by other Initial Purchasers, exceed 10% of the total
number of Offered Securities, CSFBC may make arrangements satisfactory to the
Company for the purchase of such Offered Securities by other persons, including
any of the Initial Purchasers, but if no such arrangements are made by the
Closing Date, the non-defaulting Initial Purchasers shall be obligated
severally, in proportion to their respective commitments hereunder, to purchase
the Offered Securities that such defaulting Initial Purchasers agreed but failed
to purchase. If any Initial Purchaser so defaults and the aggregate number of
Offered Securities with respect to which such default or defaults occur exceeds
10% of the total number of Offered Securities and arrangements satisfactory to
CSFBC and the Company for the purchase of such Offered Securities by other
persons are not made within 36 hours after such default, this Agreement will
terminate without liability on the part of any nondefaulting Initial Purchaser
or the Company, except as provided in Section 8. As used in this Agreement, the
term "Initial Purchaser" includes any person substituted for an Initial
Purchaser under this Section. Nothing herein will relieve a defaulting Initial
Purchaser from liability for its default.
8. Survival of Certain Representations and Obligations. The
respective indemnities, agreements, representations, warranties and other
statements of the Company or its officers and of the several Initial Purchasers
set forth in or made pursuant to this Agreement will remain in full force and
effect, regardless of any investigation, or statement as to the results thereof,
made by or on behalf of any Initial Purchaser, the Company or any of their
respective representatives, officers or directors or any controlling person, and
will survive delivery of and payment for the Offered Securities. If this
Agreement is terminated pursuant to Section 7 or if for any reason the
<PAGE> 31
31
purchase of the Offered Securities by the Initial Purchasers is not consummated,
the Company shall remain responsible for the expenses to be paid or reimbursed
by it pursuant to Section 4 and the respective obligations of the Company and
the Initial Purchasers pursuant to Section 6 shall remain in effect. If the
purchase of the Offered Securities by the Initial Purchasers is not consummated
for any reason other than solely because of the termination of this Agreement
pursuant to Section 7 or the occurrence of any event specified in clause (B),
(C) or (D) of Section 5(b)(ii), the Company will reimburse the Initial
Purchasers for all out-of-pocket expenses (including fees and disbursements of
counsel) reasonably incurred by them in connection with the offering of the
Offered Securities.
9. Notices. All communications hereunder will be in writing
and, if sent to the Initial Purchasers, will be mailed, delivered or telecopied
and confirmed to the Initial Purchasers c/o Credit Suisse First Boston
Corporation, 11 Madison Avenue, New York, NY 10010, Attention: Investment
Banking Department--Transactions Advisory Group, or, if sent to the Company,
will be mailed, delivered or telegraphed and confirmed to it at 372 Danbury
Road, Wilton, CT Attention: President; provided, however, that any notice to an
Initial Purchaser pursuant to Section 6 will be mailed, delivered or telegraphed
and confirmed to such Initial Purchaser.
10. Successors. This Agreement will inure to the benefit of
and be binding upon the parties hereto and their respective successors and the
controlling persons referred to in Section 6, and no other person will have any
right or obligation hereunder, except that holders of Offered Securities shall
be entitled to enforce the agreements for their benefit contained in the second
and third sentences of Section 4(b) hereof against the Company as if such
holders were parties thereto. No purchaser of any of the Offered Securities from
the Initial Purchasers shall be deemed a successor merely by reason of such
purchase.
11. Representation of Initial Purchasers. CSFBC will act for
the several Initial Purchasers in connection with this purchase, and any action
under this Agreement taken by CSFBC will be binding upon all the Initial
Purchasers.
12. Counterparts. This Agreement may be executed in any number
of counterparts, each of which shall be deemed to be an original, but all such
counterparts shall together constitute one and the same Agreement.
<PAGE> 32
32
13. APPLICABLE LAW. THIS AGREEMENT SHALL BE GOVERNED BY, AND
CONSTRUED IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD
TO PRINCIPLES OF CONFLICTS OF LAWS.
The Company hereby submits to the nonexclusive jurisdiction of
the Federal and state courts in the Borough of Manhattan in The City of New York
in any suit or proceeding arising out of or relating to this Agreement or the
transactions contemplated hereby.
If the foregoing is in accordance with your understanding of
our agreement, please sign and return to CSFBC a counterpart hereof, whereupon
this Agreement will become a binding agreement among the Company and the several
Initial Purchasers in accordance with its terms.
Very truly yours,
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.,
by
------------------------
Name:
Title:
The foregoing Purchase
Agreement is hereby confirmed
and accepted as of the date
first above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
UBS SECURITIES LLC
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:_________________________
Name:
Title:
<PAGE> 33
33
SCHEDULE A
<TABLE>
<CAPTION>
Initial Purchasers Units
- ------------------ -----
<S> <C>
Credit Suisse First Boston Corporation . . . . . . . . 95,753
UBS Securities LLC . . . . . . . . . . . . . . . . . . 51,559
------
147,312
=======
</TABLE>
<PAGE> 1
EXHIBIT 3.1
CERTIFICATE OF INCORPORATION
OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
THE UNDERSIGNED, for the purpose of forming a corporation pursuant to the
provisions of the General Corporation Law of the State of Delaware, does hereby
certify as follows:
FIRST: The name of the corporation is Electronic Retailing Systems
International, Inc. (the "Corporation").
SECOND: The address of the Corporation's registered office in the State of
Delaware is 32 Loockerman Square, Suite L-100, in the City of Dover, in the
County of Kent, 19901 and the name of the Corporation's registered agent at such
address is The Prentice Hall Corporation System, Inc.
THIRD: The purpose for which the Corporation is organized is to engage in
any lawful act or activity for which corporations may be organized under the
General Corporation Law of the State of Delaware.
FOURTH: the total number of shares of capital stock which the Corporation
shall have authority to issue is 2,000,000 shares of preferred stock, $1.00 par
value per share ("Preferred Stock"), and 25,000,000 shares of common stock, $.01
par value per share ("Common Stock"). The powers, designations, preferences and
relative, participating, optional or other special rights, qualifications,
limitations or restrictions of the Preferred Stock shall be as follows:
1. (a) The Preferred Stock may be issued from time to time as shares
of one or more series of Preferred Stock, and in the resolution or resolutions
providing for the issue of shares of each particular series, before issuance the
Board of Directors of the Corporation is expressly authorized to fix:
(i) the distinctive designation of such series and the number of
shares which shall constitute such series, which number may be increased
(except where otherwise provided by the Board of Directors in creating
such series) or decreased (but not below the number of shares thereof then
outstanding) from time to time by like action of the Board of Directors;
(ii) the rate of dividends payable on such series, whether or not
dividends shall be cumulative, the date or dates from which dividends
shall accrue and, if cumulative, shall be cumulative and the relationship
which such dividends shall bear to dividends payable on any other series;
1
<PAGE> 2
(iii) whether or not the shares of such series shall be subject to
redemption by the Corporation and, if so, the times, prices and other
terms and conditions of such redemption;
(iv) whether or not the shares of such series shall be subject to
the operation of a sinking fund or a fund of a similar nature and, if so,
the terms thereof;
(v) the rights of the shares of each series in case of liquidation,
dissolution or winding up of the Corporation, whether voluntary or
involuntary, or upon any distribution of its assets;
(vi) whether or not the shares of such series shall be convertible
into or exchangeable for shares of any other series or class of stock of
the Corporation and, if so, the terms of conversion or exchange;
(vii) whether or not the shares of such series shall have voting
rights in addition to the voting rights provided by law and in paragraph 5
below and, if so, the nature and extent thereof; and
(viii) the consideration to be received by the Corporation for the
shares of such series.
(b) The shares of the Preferred Stock of any one series shall be identical
with each other in all respects except as to the dates from which dividends
thereon shall accrue or be cumulative.
(c) In case the stated dividends and the amounts, if any, payable on
liquidation, dissolution or winding up of the Corporation are not paid in full,
the shares of each series of the Preferred Stock, after the payment in full of
such dividends and amounts to all series of the Preferred Stock ranking senior
to such series and before any payment to any series ranking junior thereto,
shall share ratably in the payment of dividends, including accumulations, if
any, in accordance with the sums which would be payable on said shares if all
dividends were declared and paid in full, and in any distribution of assets
other than by way of dividends in accordance with the sums which would be
payable on such distribution if all sums payable were discharged in full.
(d) Upon the issuance of any series of Preferred Stock, a certificate
setting forth the resolution or resolutions (including the designation,
description and terms of such series) adopted by the Board of Directors with
respect to such series shall be made and filed in accordance with the then
applicable requirements, if any, of the laws of the State of Delaware, or, if no
certificate is then so required, such certificate shall be signed and
acknowledged on behalf of the Corporation by its President or a Vice President
and its corporate seal shall be affixed thereto and attested by its Secretary or
an Assistant Secretary and such certificate shall be filed and kept on file at
the principal office of the Corporation
2
<PAGE> 3
in the State of Delaware and in such other place or places as the Board of
Directors shall designate.
2. The holders of each series of the Preferred Stock shall be entitled to
receive, when and as declared by the Board of Directors, but only out of funds
of the Corporation legally available for the payment of dividends, dividends in
cash at the annual rate for such series provided by the Board of Directors in
the certificate made pursuant to subparagraph (d) of paragraph 1 with respect to
such series, before any dividends shall be declared and paid upon or set apart
for the holders of any series of the Preferred Stock ranking junior to such
series as to dividends or of any junior stock, payable in respect of each
calendar quarter on a date, which shall be provided by the Board of Directors in
such certificate with respect to such series, within fifty (50) days following
the end of such quarter. Such dividends on the Preferred Stock shall be payable
to holders of such series of record on the date, not exceeding fifty (50) days
preceding the dividend payment date, fixed for the purpose by the Board of
Directors with respect to such series in advance of the payment of each
particular dividend.
3. If so provided by the Board of Directors in the certificate made
pursuant to subparagraph (d) of paragraph 1, the Corporation, at the option of
the Board of Directors (or in accordance with the requirements of any sinking
fund for any one or more series of Preferred Stock established by the Board of
Directors), may redeem the whole or any part of the Preferred Stock at any time
outstanding, or the whole or any part of any series thereof, at such time or
times and from time to time and at such redemption price or prices as may be
provided by the Board of Directors in such certificate together in each case
with all dividends accrued and accumulated but unpaid (other than non-cumulative
dividends from past dividend periods), but computed without interest, and
otherwise upon the terms and conditions fixed by the Board of Directors for any
such redemptions.
4. In the event of any liquidation, dissolution or winding up of the
Corporation, whether voluntary or involuntary, the holders of each series of the
Preferred Stock then outstanding shall be entitled to receive, after the payment
in full of all amounts to which the holders of all series of the Preferred Stock
ranking senior thereto are entitled, out of the assets of the Corporation,
before any distribution or payment shall be made to the holders of any series of
the Preferred Stock ranking junior to such series upon liquidation, dissolution
or winding up of the Corporation or of any junior stock, the amount, if any, for
each share provided by the Board of Directors in the certificate made pursuant
to subparagraph (d) of paragraph 1, plus, in respect of each such share, all
dividends accrued and accumulated but unpaid (other than non-cumulative
dividends from past dividend periods), but computed without interest. If payment
shall have been made in full to the holders of each series of the Preferred
Stock, the remaining assets of the Corporation shall be distributed among the
holders of the
3
<PAGE> 4
junior stock, according to their respective rights and preferences and pro rata
in accordance with their respective holdings.
5. On all matters with respect to which holders of the Preferred Stock or
of certain series thereof are entitled to vote as a single class, each holder of
Preferred Stock afforded such class voting right shall be entitled to one vote
for each share held.
6. For purposes of this Article FOURTH, the term "junior stock" shall mean
the Common Stock and any other class of stock of the Corporation hereafter
authorized which shall rank junior to all series of the Preferred Stock as to
dividends or preference on dissolution, liquidation or winding up of the
Corporation.
FIFTH: Subject to the provisions of the General Corporation Law of the
State of Delaware, the number of Directors of the Corporation shall be
determined as provided by the By-Laws.
SIXTH: The Corporation shall indemnify and hold harmless any director,
officer, employee or agent of the Corporation from and against any and all
expenses and liabilities that may be imposed upon or incurred by him in
connection with, or as a result of, any proceeding in which he may become
involved, as a party or otherwise, by reason of the fact that he is or was such
a director, officer, employee or agent of the Corporation, whether or not he
continues to be such at the time such expenses and liabilities shall have been
imposed or incurred, to the extent permitted by the laws of the State of
Delaware, as they may be amended from time to time.
SEVENTH: No person who is or was at any time a director of the Corporation
shall be personally liable to the Corporation or its stockholders for monetary
damages for any breach of fiduciary duty by such person as a director; provided,
however, that, unless and except to the extent otherwise permitted from time to
time by applicable law, the provisions of this Article SEVENTH shall not
eliminate or limit the liability of a director (i) for breach of the director's
duty of loyalty to the Corporation or its stockholders, (ii) for any act or
omission by the director which is not in good faith or which involves
intentional misconduct or a knowing violation of law, (iii) under Section 174 of
the General Corporation Law of the State of Delaware, or (iv) for any
transaction from which the director derived an improper personal benefit. No
amendment to or repeal of this shall apply to or have any effect on the
liability or alleged liability of any director of the Corporation for or with
respect to any act or omission of such director occurring prior to such
amendment or repeal.
EIGHTH: In furtherance and not in limitation of the general powers
conferred by the laws of the State of Delaware, the Board of Directors is
expressly authorized to make, alter or repeal the By-Laws of the Corporation,
except as specifically stated therein.
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NINTH: Whenever a compromise or arrangement is proposed between this
Corporation and its creditors or any class of them and/or between this
Corporation and its stockholders or any class of them, any court of equitable
jurisdiction within the State of Delaware may, on the application in a summary
way of this Corporation or of any creditor or stockholder thereof or on the
application of any receiver or receivers appointed for this Corporation under
the provisions of Section 291 of Title 8 of the Delaware Code or on the
application of trustees in dissolution or of any receiver or receivers appointed
for this Corporation under the provisions of Section 279 of Title 8 of the
Delaware Code, order a meeting of the creditors or class of creditors, and/or of
the stockholders or class of stockholders of this Corporation, as the case may
be, to be summoned in such manner as the said Court directs. If a majority in
number representing three-fourths ln value of the creditors or class of
creditors, and/or of the stockholders or class of stockholders of this
Corporation, as the case may be, agree to any compromise or arrangement and to
any reorganization of this Corporation as a consequence of such compromise or
arrangement, the said compromise or arrangement and the said reorganization
shall, if sanctioned by the Court to which the said application has been made,
be binding on all the creditors or class of creditors, and/or on all the
stockholders or class of stockholders of this Corporation, as the case may be,
and also on this Corporation.
TENTH: Except as otherwise required by the laws of the State of Delaware,
the stockholders and Directors shall have the power to hold their meetings and
to keep the books, documents and papers of the Corporation outside of the State
of Delaware, and the Corporation shall have the power to have one or more
offices within or without the state of Delaware, at such places as may be from
time to time designated by the By-Laws or by resolution of the stockholders or
Directors. Elections of Directors need not be by ballot unless the By-Laws of
the Corporation shall so provide.
ELEVENTH: The Corporation reserves the right to amend, alter, change or
repeal any provision contained in this Certificate of Incorporation, in the
manner now or hereafter prescribed by statute, and all rights conferred upon
stockholders herein are granted subject to this reservation.
TWELFTH: The name and address of the incorporator is Howard Kailes, c/o
Krugman, Chapnick & Grimshaw, Park 80 West - Plaza Two, Saddle Brook, New Jersey
07662.
IN WITNESS WHEREOF, the undersigned, being the incorporator hereinabove
named, does hereby execute this Certificate of Incorporation this 12th day of
February 1993.
/s/ Howard Kailes
--------------------------------------------
Howard Kailes
Incorporator
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CERTIFICATE OF DESIGNATION
OF SERIES A CUMULATIVE, CONVERTIBLE PREFERRED STOCK
OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
We, Bruce F. Failing, Jr., President, and Norton Garfinkle, Secretary of
Electronic Retailing Systems International, Inc., a corporation organized and
existing under the General Corporation Law of the State of Delaware, in
accordance with the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That pursuant to the authority conferred upon the Board of Directors by
Paragraph Fourth of the Certificate of Incorporation of said Corporation and in
accordance with the provisions of Section 151 of the General Corporation Law of
the State of Delaware, its Board of Directors on July 14, 1995, adopted the
following resolution designating a series of its Preferred Stock, $1.00 par
value, as Series A Cumulative, Convertible Preferred Stock:
RESOLVED, that pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of
Paragraph Fourth of its Certificate of Incorporation, a series of
Preferred Stock, $1.00 par value, of this Corporation, be and it hereby is
created, and that the designation and amount thereof and the voting
powers, preferences, and other special rights, qualifications, limitations
and restrictions thereof are as follows:
(A) Designation and Amount. An aggregate of 120,000 shares of
Preferred Stock, $1.00 par value, of the Corporation are hereby
constituted as a series designated as "Series A Cumulative,
Convertible Preferred Stock (the "Series A Cumulative, Convertible
Preferred Stock"). Such number of shares may be increased or
decreased by resolution of the Board of Directors; provided, that no
decrease shall reduce the number of shares of Series A Cumulative,
Convertible Preferred Stock to a number less than the number of
shares then outstanding plus the number of shares reserved for
issuance upon the exercise of outstanding options, rights, or
warrants or upon the conversion of any outstanding securities issued
by the Corporation convertible into Series A Cumulative, Convertible
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Preferred Stock.
(B) Dividends.
(i) The holders of shares of Series A Cumulative,
Convertible Preferred Stock in preference to the holders of common
stock, $.01 par value (the "Common Stock"), of the Corporation and
of any other junior stock (as hereinafter defined), shall be
entitled to receive, when, as and if declared by the Board of
Directors out of funds legally available for that purpose, quarterly
dividends in an amount per share equal to $1.875, payable on the
first day of January, April, July and October in each year (each
such date being referred to herein as a "Quarterly Dividend Payment
Date"), commencing on the first Quarterly Dividend Payment Date
after the first issuance of a share or fraction of a share of Series
A Cumulative, Convertible Preferred Stock, at the election of the
Corporation (as determined by the Board of Directors) in cash or in
additional shares of Series A Cumulative Convertible Preferred stock
having a value equal to such amount (each such share, for purposes
hereof, to be deemed to have a value of $100).
(ii) Dividends shall begin to accrue and be cumulative,
whether or not earned or declared, on outstanding shares of Series A
Cumulative, Convertible Preferred Stock from and after the date of
issue of such shares, unless the date of issue of such shares is
prior to the record date for the first Quarterly Dividend Payment
Date, in which case dividends on such shares shall begin to accrue
from the date of issue of such shares, or unless the date of issue
is a Quarterly Dividend Payment Date or is a date after the record
date for the determination of holders of shares of Series A
Cumulative, Convertible Preferred Stock entitled to receive a
Quarterly Dividend and before such Quarterly Dividend Payment Date,
in either of which events such dividends shall begin to accrue and
be cumulative for such Quarterly Dividend Payment Date. Accrued but
unpaid dividends shall not bear interest. Dividends paid on the
shares of Series A Cumulative, Convertible Preferred Stock in an
amount less than the total amount of such dividends at the time
accrued and payable on such shares shall be allocated pro-rata on a
share-by-share basis among all such shares at the time outstanding.
The Board of Directors may fix a record date for the determination
of holders of shares of Series A Cumulative, Convertible Preferred
Stock entitled to receive payment of a dividend declared, which
record date shall not be more than
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50 days prior to the date fixed for the payment thereof.
(C) Voting Rights. Holders of shares of Series A Cumulative,
Convertible Preferred Stock shall have the following voting rights:
(i) Subject to the provisions for adjustment hereinafter
set forth, each share of Series A Cumulative, Convertible Preferred
Stock shall entitle the holder thereof to one vote on all matters
submitted to a vote of the shareholders of the Corporation. In the
event the Corporation shall at any time declare or pay any dividend
on the Common Stock payable in shares of Common Stock, or effect a
subdivision or combination or consolidation of the outstanding
shares of Common Stock (by reclassification or otherwise than by
payment of a dividend in shares of Common Stock) into a greater or
lesser number of shares of Common Stock, then in each such case the
number of votes per share to which holders of shares of Series A
Cumulative, Convertible Preferred Stock were entitled immediately
prior to such event shall be adjusted by multiplying such number by
a fraction, the numerator of which is the number of shares of Common
Stock outstanding immediately after such event and the denominator
of which is the number of shares of Common Stock that were
outstanding immediately prior to such event.
(ii) Except as otherwise provided herein, in any other
Statement of Resolution creating a series of preferred stock or any
similar stock, or by law, the holders of shares of Series A
Cumulative, Convertible Preferred Stock and the holders of shares of
Common Stock and any other capital stock of the Corporation having
general voting rights shall vote together as one class on all
matters submitted to a vote of stockholders of the Corporation.
(D) Conversion.
(i) Right to Convert. Subject to and upon compliance with
the provisions hereof, each holder of record of shares of Series A
Cumulative, Convertible Preferred Stock shall have the right, at
such holder's option, at any time or from time to time after the
issuance, respectively, of the shares held by such holder (except
that upon any liquidation of the Corporation the right of conversion
shall terminate at the close of business on the last full business
day next preceding the date fixed for payment of the amount
distributable
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on the Series A Cumulative, Convertible Preferred Stock), to convert
any such shares into such number of shares of Common Stock as is
obtained by multiplying the number of shares of Series A Cumulative,
Convertible Preferred Stock so to be converted by $100.00 and
dividing the result by the applicable Conversion Price (as
hereinafter defined).
(ii) Exercise. In order to exercise the conversion
privilege, the holder of Series A Cumulative, Convertible Preferred
Stock shall surrender a certificate or certificates for the shares
so to be converted to the Corporation at the principal executive
offices of the Corporation at 372 Danbury Road, Wilton, Connecticut
06897 (or such other office or agency of the Corporation as the
Corporation may designate by notice in writing to the holders of
record of Series A Cumulative, Convertible Preferred Stock),
accompanied by written notice to the Corporation that the holder
elects to convert a stated number of shares of Series A Cumulative,
Convertible Preferred Stock into Common Stock. Such notice shall
also state the name or names (with address or addresses) in which
the certificate or certificates for shares of Common Stock which
shall be issuable on such conversion shall be issued, in each case
subject to the provisions of applicable law. As soon as practicable
after the receipt of such notice and the surrender of the
certificate or certificates for the shares of Series A Cumulative,
Convertible Preferred Stock to be converted, the Corporation shall
issue and shall deliver at said offices to the holder a certificate
or certificates for the number of full shares of Common Stock
issuable upon the conversion of such share or shares of Series A
Cumulative, Convertible Preferred Stock, and provision shall be made
for any fraction of a share a provided in Paragraph (iii) hereof.
Such conversion shall be deemed to have been effected immediately
prior to the close of business on the date on which such notice
shall have been received by the Corporation and conversion shall be
at the Conversion Price in effect at such time, and at such time the
rights of the holder of such share or shares of Series A Cumulative,
Convertible Preferred Stock shall cease and the person or persons in
whose name or names any certificate or certificates for shares of
Common Stock shall be issuable upon such conversion shall be deemed
to have become the holder or holders of record of the shares of
Common Stock represented thereby.
(iii) Adjustment for Fractional Shares;
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Dividends; Partial Conversions. No fractional shares of Common Stock
or scrip shall be issued upon conversion of Series A Cumulative,
Convertible Preferred Stock, and no payment or adjustment shall be
made upon any conversion on account of any cash dividends on the
Common Stock issued upon such conversion. In case the number of
shares of Series A Cumulative, Convertible Preferred Stock
represented by the certificate or certificates surrendered pursuant
to Paragraph (ii) exceeds the number of shares converted, the
Corporation shall, upon such conversion, execute and deliver to the
holder thereof, at the expense of the Corporation, a new certificate
or certificates for the number of shares of Series A Cumulative,
Convertible Preferred Stock represented by the certificate or
certificates surrendered which are not to be converted. Instead of
any fractional shares of Common Stock which would otherwise be
issuable upon conversion, the Corporation shall pay a cash
adjustment in respect of such fractional share of Common Stock in an
amount equal to the same fraction of the then current fair value of
a share of Common Stock, as determined in good faith by the Board of
Directors of the Corporation.
(iv) Conversion Price. The Conversion Price per share of
Common Stock shall be $4.00, subject to adjustment as herein
provided. In the event that, on or prior to March 31, 1996, the
Corporation from time to time enters into definitive arrangements
providing for, the delivery of, or delivers, shares of Common Stock,
or Convertible Securities (as hereinafter defined) convertible or
exchangeable for Common Stock, or Options (as hereinafter defined)
for the purchase of Common Stock or any Convertible Securities, in a
transaction providing for a price per share of Common Stock that is
less than the Conversion Price then in effect, the Conversion Price
shall in each case forthwith be reduced to such lesser price per
share. The Corporation shall deliver prompt notice to each holder of
shares of Series A Cumulative, Convertible Preferred Stock of each
such transaction and such reduction.
(v) Adjustment for Dividends. In case the Corporation
shall declare a dividend upon the shares of Common Stock payable
otherwise than out of earned surplus or otherwise than in shares of
Common Stock or convertible securities of the Corporation, the
Conversion Price in effect immediately prior to the declaration of
such dividend shall be reduced by an amount equal, in the case of a
dividend in cash, to the amount
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thereof payable per share of Common Stock or, in the case of any
other dividend, to the fair value thereof per share of Common Stock
as determined in good faith by the Board of Directors of the
Corporation. For the purposes of the foregoing, a dividend other
than in cash shall be considered payable out of earned surplus only
to the extent that such earned surplus is charged an amount equal to
the fair value of such dividend as determined in good faith by the
Board of Directors of the Corporation. For the purposes of the
foregoing, a dividend other than in cash shall be considered payable
out of earned surplus only to the extent that such earned surplus is
charged an amount equal to the fair value of such dividend as
determined in good faith by the Board of Directors of the
corporation. Such reductions shall take effect as of the date on
which a record is taken for the purpose of such dividend, or, if a
record is not taken, the date as of which the holders of shares of
Common Stock of record entitled to such dividend are to be
determined.
(vi) Subdivisions and Combinations; Stock Dividends. In
case the Corporation shall at any time subdivide its outstanding
shares of Common Stock into a greater number of shares of Common
Stock, the Conversion Price in effect immediately prior to such
subdivision shall be proportionately reduced, and conversely, in
case the outstanding shares of Common Stock of the Corporation shall
be combined into a smaller number of shares of Common Stock, the
Conversion Price in effect immediately prior to such combination
shall be proportionately increased. In case the Corporation shall
declare a dividend or make any other distribution upon any stock of
the Corporation payable in Common Stock, or any other stock or
securities convertible into or exchangeable for Common Stock
("Convertible Securities"), or options ("Options") for the purchase
of Common Stock or any Convertible Securities, any Common Stock,
Options or Convertible Securities, as the case may be, issuable in
payment of such dividend or distribution shall be deemed to have
been issued in a subdivision of outstanding shares as provided in
this Sub-paragraph (vi). In case the Corporation shall take a record
of the holders of its Common Stock for the purpose of entitling them
(a) to receive a dividend or other distribution payable in Common
Stock, Options or Convertible Securities, or (b) to subscribe for or
purchase Common Stock, Options or Convertible Securities, then such
record date shall be deemed to be the date of such dividend or the
making of such other distribution
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or the date of the granting of such right of subscription or
purchase, as the case may be.
(vii) Consolidation, Merger, Sale of Assets,
Reorganization or Reclassifications. If any consolidation or merger
of the Corporation with another corporation, or the sale of all or
substantially all of its assets to another corporation shall be
effected, or in case of any capital reorganization or
reclassification of the capital stock of the Corporation, then, as a
condition of such consolidation, merger or sale, reorganization or
reclassification, lawful and adequate provision shall be made
whereby each holder of record of the Series A Cumulative,
Convertible Preferred Stock shall thereafter have the right to
purchase and receive upon the basis and upon the terms and
conditions specified herein and in lieu of the shares of Common
Stock immediately theretofore purchasable and receivable upon the
conversion of Series A Cumulative, Convertible Preferred Stock, such
shares of stock, securities or assets as may be issuable or payable
with respect to or in exchange for a number of outstanding shares of
Common Stock of the Corporation equal to the number of shares of
Common Stock immediately theretofore purchasable and receivable by
such holder had such consolidation, merger, sale, reorganization, or
reclassification not taken place, and in any such case appropriate
provision shall be made with respect to the rights and interest of
such holder to the end that the provisions hereof (including without
limitation provisions for adjustment of the Conversion Price) shall
thereafter be applicable, as nearly as may be, in relation of any
shares of stock, securities or assets thereafter deliverable upon
the exercise of such conversion rights.
(viii) Notice of Adjustment of Conversion Price. Upon any
adjustment of the Conversion Price then and in each such case the
Corporation shall give written notice thereof, by first class mail,
postage prepaid, to each holder of record of Series A, Cumulative
Convertible Preferred Stock, which notice shall state the Conversion
Price resulting from such adjustment, setting forth in reasonable
detail the method of calculation and the facts upon which such
calculation is based.
(ix) Notice of Certain Actions. In case at any time:
(a) the Corporation shall declare to the holders
of its shares of Common Stock any cash dividend at a rate in excess
of the rate of the
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last cash dividend theretofore paid;
(b) the Corporation shall declare any dividend
upon its shares of Common Stock payable in stock or make any special
dividend or other distribution (other than a cash dividend to the
holders of its shares of Common Stock);
(c) the Corporation shall offer for subscription
pro rata to the holders of its shares of Common Stock any additional
shares of stock of any class or other rights;
(d) there shall be any capital reorganization or
reclassification of the capital stock of the Corporation, or
consolidation or merger of the Corporation with, or sale of all or
substantially all its assets to, another corporation; or
(e) there shall be a voluntary or involuntary
dissolution, liquidation or winding-up of the Corporation;
then, in any one or more of said cases, the Corporation shall give
written notice, by first class mail, postage prepaid, to each holder
of record of Series A Convertible Preferred Stock, of the date on
which (A) the books of the Corporation shall close or a record shall
be taken for such dividend, distribution or subscription rights, or
(B) such reorganization, reclassification, consolidation, merger,
sale, dissolution, liquidation or winding-up shall take place, as
the case may be. Such notice shall also specify the date as of which
the holders of shares of Common Stock of record shall participate in
such dividend, distribution or subscription rights or shall be
entitled to exchange their shares of Common Stock for securities or
other property deliverable upon such reorganization,
reclassification, consolidation, merger, sale, dissolution,
liquidation, or winding-up, as the case may be. Such written notice
shall be given at least 30 days prior to the action in question and
not less than 30 days prior to the record date or the date on which
the Corporation's transfer books are closed in respect thereto.
(x) Reservation of Shares. The Corporation shall at all
times reserve and keep available out of its authorized shares of
Common Stock or its treasury shares, solely for the purpose of issue
upon the conversion of shares of Series A Cumulative, Convertible
Preferred Stock, such number of shares of Common Stock as shall then
be
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issuable upon the conversion of all outstanding shares of Series A
Cumulative, Convertible Preferred Stock. The Corporation shall not
take any action which results in any adjustment of the Conversion
Price if the total number of shares of Common Stock issued and
issuable after such action upon conversion of the Series A
Cumulative, Convertible Preferred Stock would exceed the total
number of shares of Common Stock then authorized by the Articles of
Incorporation of the Corporation.
(xi) Taxes. The issuance of certificates of shares of
Common Stock upon the conversions of Series A Cumulative,
Convertible Preferred Stock shall be made without charge to the
holders thereof for any issuance tax in respect thereto; provided,
however, that the Corporation shall not be required to pay any tax
which may be payable in respect of any transfer involved in the
issuance and delivery of any certificate in a name other than that
of the holders of record of Series A Cumulative, Convertible
Preferred Stock, respectively.
(xii) Closing of Books. The Corporation will at no time
close its transfer books against the transfer of any shares of
Common Stock issued or issuable upon the conversion of any shares of
Series A Cumulative, Convertible Preferred Stock in any manner which
interferes with the timely conversion of Series A Cumulative,
Convertible Preferred Stock.
(xiii) Miscellaneous. Notwithstanding any other provision
of this Section (D), conversion of the Series A Cumulative,
Convertible Preferred Stock shall be subject to the requirement that
if at any time the Board of Directors shall determine that the
registration, listing or qualification of the shares of Common Stock
covered thereby upon any securities exchange or under any federal or
state law, or the consent or approval of any governmental regulatory
body is necessary or desirable as a condition of, or in connection
with, the acquisition of shares of Common Stock upon conversion, no
such conversion may be effected unless and until such registration,
listing, qualification, consent or approval shall have been effected
or obtained free of any conditions not acceptable to the Board of
Directors. The Company may require that any person converting Series
A Cumulative, Convertible Preferred Stock shall make such
representations and agreements and furnish such information as it
deems appropriate to assure compliance with the foregoing or any
other applicable legal requirement.
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(E) Certain Restrictions.
(i) Whenever quarterly annual dividends payable on the
Series A Cumulative, Convertible Preferred Stock as provided in
Section B hereof are in arrears, thereafter and until all accrued
and unpaid dividends, whether or not earned or declared, on shares
of Series A Cumulative, Convertible Preferred Stock outstanding
shall have been paid in full, the Corporation shall not:
(a) declare or pay dividends on any shares of
stock ranking junior (either as to dividends or upon liquidation,
dissolution or winding up) to the Series A Cumulative, Convertible
Preferred Stock; or
(b) declare or pay dividends on any shares ranking
pari passu (either as to dividends or upon liquidation, dissolution
or winding up) with the Series A Cumulative, Convertible Preferred
Stock, except dividends paid ratably on the Series A Cumulative,
Convertible Preferred Stock and all such parity stock on which
dividends are payable or in arrears in proportion to the total
amounts to which the holders of all such shares are then entitled.
(ii) The Corporation shall not, as long as any shares of
Series A Cumulative, Convertible Preferred Stock are outstanding,
consolidate or merge with any other corporation or entity unless:
(x) immediately after such consolidation or merger the successor
shall have stockholders' equity (or the equivalent thereof), on a
consolidated basis and determined in accordance with generally
accepted accounting principles, no less than the Corporation's
stockholders' equity, as so determined, immediately prior to such
transaction; and (y) (I) the Corporation is the successor or, if not
(II) a Change in Control [as hereinafter defined] shall occur as a
result of such transaction or the shares of Series A Cumulative
Convertible Preferred Stock shall be exchanged for preferred
securities of the successor having terms substantially equivalent to
the terms applicable to the Series A Cumulative Convertible
Preferred Stock. For purposes hereof, "Change in Control" shall mean
a change in control of the Corporation of a nature that would be
required to be reported in response to Item 6(e) of Schedule 14A of
Regulation 14A (or in response to any similar item or any similar
schedule or form) promulgated under the Securities and Exchange Act
of 1934, whether or not the Corporation is then subject to such
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reporting requirement.
(F) Reacquired Shares. Any shares of the Series A Cumulative,
Convertible Preferred Stock purchased or otherwise acquired by this
Corporation in any manner whatsoever shall be retired and cancelled
promptly after the acquisition thereof. All such shares shall upon
their cancellation become authorized but unissued as shares of
Preferred Stock and may be reissued as Series A Cumulative,
Convertible Preferred Stock or as part of a new series of Preferred
Stock subject to the conditions and restrictions of issuance set
forth herein, in the Certificate of Incorporation or as otherwise
required by law.
(G) Liquidation, Dissolution or Winding Up.
(i) Upon any liquidation, dissolution or winding up of
this Corporation, no distribution shall be made to the holders of
shares of stock ranking junior (either as to dividends, or upon
liquidation, dissolution or winding up) to the Series A Cumulative,
Convertible Preferred Stock unless prior thereto, the holders of
shares of Series A Cumulative, Convertible Preferred Stock shall
have received $100 per share, plus an amount equal to accrued and
unpaid dividends thereon, whether or not declared or earned, to the
date of such payment. After such payments to holders of Series A
Cumulative, Convertible Preferred Stock, the holders thereof, as
such, shall not have any right to participate in any further
distribution of or payment out of the assets of the Corporation.
(ii) If upon any voluntary or involuntary liquidation,
dissolution or winding up of the Corporation, the assets available
for distribution to holders of shares of Series A Cumulative,
Convertible Preferred Stock shall be insufficient to pay such
holders the full preferential amount to which they are entitled,
then such assets shall be distributed ratably among the shares of
Series A Cumulative, Convertible Preferred Stock in accordance with
the respective preferential amounts, including unpaid cumulative
dividends, if any, payable with respect thereto.
(H) Optional Redemption. (i) Each share of Series A
Cumulative, Convertible Preferred Stock shall, out of funds legally
available for that purpose, be subject to redemption, at the
election of the Corporation, on any date (the "Redemption Date")
subsequent to issuance, at a redemption price of $100, plus an
amount equal to all accrued and unpaid dividends on such share,
whether or not declared or earned, to the Redemption Date, in each
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case subject to the limitations of the immediately succeeding
sentence. Notice of each redemption shall be mailed at least 30 days
prior to the Redemption Date with respect thereto, shall state that
the Series A Cumulative, Convertible Preferred Stock, or part
thereof, shall be redeemed, and the date, place and purchase price
of such redemption, upon surrender of the certificates representing
shares of Series A Cumulative, Convertible Preferred Stock, and
shall be given to the holders of record of the shares of Series A
Cumulative, Convertible Preferred Stock to be redeemed, by first
class mail, postage prepaid, at such holder's address of record;
provided, however, that no such notice may be delivered unless the
Market Price per share (as hereinafter defined) shall be in excess
of 150% of the Conversion Price per share then in effect on at least
20 of the 30 consecutive trading days ending five days prior to date
of notice (and, provided, further that, on each of such 20 days the
average daily trading volume exceeds 1,000 shares); and provided,
further, that the Common Stock shall, through the period of such
calculation and on the date of such notice, be listed or admitted to
trading on a national securities exchange or reported on the NASDAQ
National Market System or otherwise reported by NASDAQ or The
National Quotation Bureau Incorporated (or similar reputable
quotation and reporting service, if not reported by The National
Quotation Bureau Incorporated).
(ii) For purposes hereof, "Market Price" on any trading
day shall be the last reported sales price regular way of the Common
Stock or, in case no such reported sales took place on such day, the
average of the last reported bid and asked prices regular way of the
Common Stock, in either case on the principal national securities
exchange on which the Common Stock is listed or admitted to trading
(or if the Common Stock is not at the time listed or admitted for
trading on any such exchange, then such price as shall be equal to
the average of the last reported sale price of the Common Stock, as
reported on the NASDAQ National Market System on such day, or if the
Common Stock is not so reported, then such price as shall be equal
to the average of the last reported bid and asked prices of the
Common Stock, as reported by NASDAQ on such day, or if, on any day
in question, the security shall not be quoted on NASDAQ, then such
price shall be equal to the average of the last reported bid and
asked prices of the Common Stock on such day as reported by The
National Quotation Bureau Incorporated (or any similar reputable
quotation and reporting service, if such quotation is not reported
by the National Quotation Bureau
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Incorporated).
(iii) In the event that the Corporation at any particular
time proposes to redeem fewer than all of the then outstanding
shares of Series A Cumulative, Convertible Preferred Stock, the
shares of Series A Cumulative, Convertible Preferred Stock to be
redeemed shall be selected in such manner that the number of shares
of Series A Cumulative, Convertible Preferred Stock (to the nearest
full share) to be redeemed from each holder of record of Series A
Cumulative, Convertible Preferred Stock shall bear the same
proportional relationship to all shares of Series A Cumulative,
Convertible Preferred Stock held by such holder as the aggregate
number of shares to be redeemed bears to all the shares of Series A
Cumulative, Convertible Preferred Stock then outstanding. On the
Redemption Date, all dividends on the shares to be redeemed shall
cease to accrue, all rights with respect to such shares so to be
redeemed shall forthwith on such date cease and determine (except
only the right of the holder to receive the redemption price
therefor, but without any interest) and such shares so called for
redemption shall no longer be deemed outstanding.
(iv) On or before the Redemption Date, the respective
holders of record of the Series A Cumulative, Convertible Preferred
Stock to be redeemed shall deliver to the Corporation the
certificates for the shares to be redeemed. Such certificates, if
required by the Corporation, shall be properly stamped for transfer
and duly endorsed in blank or accompanied by proper instruments of
assignment and transfer thereof duly executed in blank, with all
signatures appropriately guaranteed by a national bank or a firm
which is a member of the New York Stock Exchange, Inc. If any holder
of Series A Cumulative, Convertible Preferred Stock shall fail to
tender his shares of Series A Cumulative, Convertible Preferred
Stock as provided above, the Corporation shall have the right to
cancel said shares upon its books and pay to such stockholder the
Redemption Price for such shares. Any such cancelled shares shall
for all purposes be considered to have been redeemed as provided
herein.
(v) In case any shares of Preferred Stock shall have been
called for redemption by the giving of notice as provided herein,
the right of conversion with respect to the shares so called for
redemption shall cease and terminate at the close of business on the
business day immediately preceding the Redemption Date stated in the
notice
18
<PAGE> 19
of redemption. The right of conversion shall thereafter be
reinstated with respect to any share or shares of Preferred Stock if
the Corporation shall have defaulted in payment of the redemption
price aforesaid for such share or shares.
(I) Junior Stock; Common Stock. For purposes hereof: (a) the
term "junior stock" shall mean the Common Stock and any other class
of stock of the Corporation hereinafter authorized which shall rank
junior to the Series A Cumulative, Convertible Preferred Stock as to
all dividends or preference on dissolution, liquidation or winding
up of the Corporation; and (b) the term "Common Stock" shall mean
shares of the common stock, $.01 par value, of the Corporation and
shall also include shares of any capital stock of any class of the
Corporation hereinafter authorized which shall not be limited to a
fixed sum or percentage or par value in respect of the rights of the
holders thereof to participate in dividends and in the distribution
of assets upon the voluntary liquidation, dissolution or winding-up
of the corporation; provided, however, that the shares of Common
Stock receivable upon conversion of shares of Series A Preferred
Stock shall include only shares of Common Stock, as constituted on
July , 1995 (including ny stock into which it may be changed,
reclassified or converted).
(J) No Pre-Emption; Amendment. No right to subscribe for or to
take any stock of any class or any securities convertible to any
stock, at any time issued by the Corporation shall vest in or accrue
to any holder of shares of Series A Cumulative, Convertible
Preferred Stock with respect to any shares which he holds. The
Certificate of Incorporation of this Corporation shall not be
amended in any manner which would materially alter or change the
powers, preferences or special rights of the Series A Cumulative,
Convertible Preferred Stock so as to affect them adversely without
the affirmative vote of the holders of at least two-thirds of the
outstanding shares of Series A Cumulative, Convertible Preferred
Stock, voting together as a single series.
This resolution was duly adopted by the Board of Directors of this
Corporation at a meeting thereof duly called and held on July 14, 1995, at which
a quorum was present and acting throughout.
19
<PAGE> 20
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunder affixed and this Certificate of Designation to be signed by Bruce F.
Failing, Jr., its President and attested to, by Norton Garfinkle, its Secretary,
on the 18th day of July, 1995.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By s/Bruce F. Failing, Jr.
-----------------------------------------
Bruce F. Failing, Jr.
President
[Seal]
Attest:
s/Norton Garfinkle
- -------------------------------
Norton Garfinkle
Secretary
20
<PAGE> 21
AMENDED
CERTIFICATE OF DESIGNATION OF
SERIES A CUMULATIVE, CONVERTIBLE PREFERRED STOCK OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
Pursuant to Section 151 of the
General Corporation Law of the State of Delaware
We, William B. Fischer, Vice-President, and Howard Kailes, Assistant
Secretary, of Electronic Retailing Systems International, Inc., a corporation
organized and existing under the laws of the State of Delaware, in accordance
with the provisions of Section 103 thereof, DO HEREBY CERTIFY:
That its Board of Directors on December 14, 1995 adopted the following
resolution authorizing and directing an increase in the number of shares of the
Series A Cumulative, Convertible Preferred Stock set forth in the Certificate of
Designation of Series A Cumulative, Convertible Preferred Stock of Electronic
Retailing Systems International, Inc. filed with the Secretary of State of the
State of Delaware on July 21, 1995:
RESOLVED, that, pursuant to the authority vested in the Board of
Directors of this Corporation in accordance with the provisions of Section
151(g) of the General Corporation Law of the State of Delaware, the number
of shares of the Series A Cumulative, Convertible Preferred Stock, $1.00
par value, of the Corporation be, and it hereby is, increased from the
current 120,000 shares to 140,000 shares, and that, in furtherance
thereof, the first sentence of Section (A) of the resolution of the Board
of Directors of the Corporation adopted on July 14, 1995 creating such
Series A Cumulative, Convertible Preferred Stock and set forth in the
Certificate of Designation of the Series A Cumulative, Convertible
Preferred Stock of Electronic Retailing Systems International, Inc. be,
and it hereby is, deleted in its entirety, and the following sentence
substituted in lieu thereof:
"An aggregate of 140,000 shares of Preferred Stock, $1.00 par value,
of the Corporation are hereby constituted as a series designated as
"Series A Cumulative, Convertible Preferred Stock (the "Series A
Cumulative, Convertible Preferred Stock")."
; and the proper officer or officers of the Corporation be, and each of
them hereby is, authorized and empowered, in the name and on behalf of the
Corporation, to execute and file or cause to be filed with the Secretary
of State of the State of Delaware, an appropriate certificate
21
<PAGE> 22
setting forth the foregoing amendment to the Certificate of Designation of
the Series A Cumulative, Convertible Preferred Stock of Electronic
Retailing Systems International, Inc.
This resolution was duly adopted by the Board of Directors of Electronic
Retailing Systems International, Inc. at a meeting thereof duly called and held
on December 14, 1995, at which a quorum was present and acting throughout.
IN WITNESS WHEREOF, the Company has caused this Certificate to be signed
by William B. Fischer, its Vice-President, and attested by Howard Kailes, its
Assistant Secretary, this 26th day of December, 1995.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By s/William B. Fischer
------------------------------------------
William B. Fischer
Vice-President
ATTEST:
s/Howard Kailes
- ------------------------------
Howard Kailes
Assistant Secretary
22
<PAGE> 23
CERTIFICATE ELIMINATING REFERENCE TO
SERIES A CUMULATIVE, CONVERTIBLE PREFERRED STOCK
FROM THE CERTIFICATE OF INCORPORATION
OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
Pursuant to Section 151(g) of
the General Corporation Law of the State of Delaware
We, William B. Fischer, Vice President, and Howard Kailes, Assistant
Secretary, of Electronic Retailing Systems International, Inc., a corporation
organized and existing under the General Corporation Law of the State of
Delaware, in accordance with the provisions of Section 103 thereof, DO HEREBY
CERTIFY:
That in accordance with the provisions of Section 151(g) of the General
Corporation Law of the State of Delaware, its Board of Directors on July 11,
1996, adopted the following resolutions eliminating its Series A Cumulative,
Convertible Preferred Stock, $1.00 par value:
WHEREAS, pursuant to a Certificate of Designation filed on behalf of
the Corporation with the Secretary of State of Delaware on July 21, 1995,
as amended by an Amended Certificate of Designation filed on behalf of the
Corporation with the Secretary of State of Delaware on December 26, 1995,
this Corporation created its Series A Cumulative, Convertible Preferred
Stock, $1.00 par value (the "Series A Preferred Stock"); and
WHEREAS, none of the authorized Series A Preferred Stock so
designated is outstanding; and
WHEREAS, none of the said Series A Preferred Stock of the
Corporation will be issued;
NOW THEREFORE, BE IT RESOLVED, that the appropriate officers of the
Corporation be and hereby are authorized and directed to file a
certificate setting forth this resolution with the Secretary of State of
the State of Delaware pursuant to the provisions of Section 151(g) of the
General Corporation Law of the State of Delaware for the purpose of
eliminating from the certificate of incorporation of the Corporation all
reference to the said Series A Cumulative, Convertible Preferred Stock.
23
<PAGE> 24
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunder affixed and this certificate to be signed by William B. Fischer, its
Vice President and attested to by Howard Kailes, its Assistant Secretary, on the
11th day of July, 1996.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By s/William B. Fischer
----------------------------------
William B. Fischer, Vice President
Attest:
s/Howard Kailes
- ----------------------------------
Howard Kailes, Assistant Secretary
24
<PAGE> 25
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC., a corporation organized
and existing under the General Corporation Law of the State of Delaware (the
"Corporation") pursuant to the provisions of the General Corporation Law of the
State of Delaware (the "GCL") does hereby certify as follows:
FIRST: The Certificate of Incorporation is hereby amended by deleting the
first sentence of the first paragraph of Article FOURTH in its present form and
substituting therefor a new sentence in the following form:
"FOURTH: The total number of shares of capital stock which the
corporation shall have the authority to issue is 2,000,000 shares of
preferred stock, $1.00 par value per share ("Preferred Stock"), and
35,000,000 shares of common stock, $.01 par value per share ("Common
Stock")."
SECOND: The amendment to the Certificate of Incorporation of the
Corporation set forth in this Certificate of Amendment has been duly adopted in
accordance with the applicable provisions of Section 242 of the GCL (a) the
Board of Directors of the Corporation having duly adopted resolutions setting
forth such amendment and declaring its advisability at a meeting of the Board of
Directors of the Corporation duly called and held on September 26, 1996 in
conformity with the By-laws of the Corporation, and (b) the stockholders of the
Corporation having duly adopted such amendment by the affirmative vote of the
holders of the majority of
25
<PAGE> 26
the outstanding stock entitled to vote thereon on January 13, 1997, taken at the
Corporation's annual meeting of stockholders duly called and held upon notice in
accordance with Section 222 of the GCL.
IN WITNESS WHEREOF, ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC. has
caused this certificate to be signed and attested by duly authorized officers as
of the 13th day of January, 1997.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By s/Bruce F. Failing, Jr.
-------------------------
Bruce F. Failing, Jr.
President
ATTEST:
s/Howard Kailes
- -----------------------------
Howard Kailes
Assistant Secretary
26
<PAGE> 1
EXHIBIT 3.2
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
BY-LAWS
AS AMENDED TO FEBRUARY 6, 1997
ARTICLE I
Offices
The registered office of the Corporation shall be in the City of Dover,
County of Kent, State of Delaware.
The Corporation may also have offices at such other places, both within
and without the State of Delaware, as may from time to time be designated by the
Board of Directors.
ARTICLE II
Books
The books and records of the Corporation may be kept (except as
otherwise provided by the laws of the State of Delaware) outside of the State of
Delaware and at such place or places as may from time to time be designated by
the Board of Directors.
ARTICLE III
Stockholders
Section 1. Annual Meetings. The annual meeting of the stockholders of
the Corporation for the election of Directors and the transaction of such other
business as may properly come before said meeting shall be held at the principal
business office of the Corporation or at such other place or places either
within or without the State of Delaware as may be designated by the Board of
Directors and stated in the notice of the meeting, on the second Thursday in
June in each year, if not a legal holiday, and, if a
<PAGE> 2
legal holiday, then on the next weekday not a legal holiday, at 10:00 o'clock in
the morning.
Written notice of the place designated for the annual meeting of the
stockholders of the Corporation shall be delivered personally or mailed to each
stockholder entitled to vote thereat not less than ten (10) and not more than
sixty (60) days prior to said meeting, but at any meeting at which all
stockholders shall be present, or of which all stockholders not present have
waived notice in writing, the giving of notice as above described may be
dispensed with. If mailed, said notice shall be directed to each stockholder at
his address as the same appears on the stock ledger of the Corporation unless he
shall have filed with the Secretary of the Corporation a written request that
notices intended for him be mailed to some other address, in which case it shall
be mailed to the address designated in such request.
Section 2. Special Meetings. Special meetings of the stockholders of
the Corporation shall be held whenever called in the manner required by the laws
of the State of Delaware for purposes as to which there are special statutory
provisions, and for other purposes whenever called by resolution of the Board of
Directors, or by the Chairman of the Board, the President, or by the holders of
a majority of the outstanding shares of capital stock of the Corporation the
holders of which are entitled to vote on matters that are to be voted on at such
meeting. Any such special meeting of stockholders may be held at the principal
business office of the Corporation or at such other place or places, either
within or without the State of Delaware, as may be
<PAGE> 3
specified in the notice thereof. Business transacted at any special meeting of
stockholders of the Corporation shall be limited to the purposes stated in the
notice thereof.
Except as otherwise expressly required by the laws of the State of
Delaware, written notice of each special meeting, stating the day, hour and
place, and in general terms the business to be transacted thereat, shall be
delivered personally or mailed to each stockholder entitled to vote thereat not
less than ten (10) days and not more than sixty (60) days before the meeting. If
mailed, said notice shall be directed to each stockholder at his address as the
same appears on the stock ledger of the Corporation unless he shall have filed
with the Secretary of the Corporation a written request that notices intended
for him be mailed to some other address, in which case it shall be mailed to the
address designated in said request. At any special meeting at which all
stockholders shall be present, or of which all stockholders not present have
waived notice in writing, the giving of notice as above described may be
dispensed with.
Section 3. List of Stockholders. The officer of the Corporation who
shall have charge of the stock ledger of the Corporation shall prepare and make,
at least ten (10) days before every meeting of stockholders, a complete list of
the stockholders entitled to vote at said meeting, arranged in alphabetical
order and showing the address of each stockholder and the number of shares
registered in the name of each stockholder. Such list shall be open to the
examination of any stockholder, for any purpose germane to the meeting, during
ordinary business hours for a period of at least
<PAGE> 4
ten (10) days prior to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or, if not so specified, at the place where the meeting is to be held.
The list shall also be produced and kept at the time and place of the meeting
during the whole time thereof, and may be inspected by any stockholder who is
present.
Section 4. Quorum. At any meeting of the stockholders of the
Corporation, except as otherwise expressly provided by the laws of the State of
Delaware, the Certificate of Incorporation or these By-Laws, there must be
present, either in person or by proxy. in order to constitute a quorum,
stockholders owning a majority of the issued and outstanding shares of the
capital stock of the Corporation entitled to vote at said meeting. At any
meeting of stockholders at which a quorum is not present, the holders of, or
proxies for, a majority of the stock which is represented at such meeting, shall
have power to adjourn the meeting from time to time, without notice other than
announcement at the meeting, until a quorum shall be present or represented. At
such adjourned meeting at which a quorum shall be present or represented any
business may be transacted which might have been transacted at the meeting as
originally noticed. If the adjournment is for more than thirty (30) days, or if
after the adjournment a new record date is fixed for the adjourned meeting, a
notice of the adjourned meeting shall be given to each stockholder of record
entitled to vote the meeting.
Section 5. Organization. The Chairman of the Board, or in his
<PAGE> 5
absence the President, shall call to order meetings of the stockholders and
shall act as chairman of such meetings. The Board of Directors or the
stockholders may appoint any stockholder or any other Director or officer of the
Corporation to act as chairman of any meeting in the absence of the Chairman of
the Board and the President. The Secretary of the Corporation shall act as
secretary of all meetings of the stockholders, but in the absence of the
Secretary the presiding officer may appoint any other person to act as secretary
of any meeting.
Section 6. Voting. Except as otherwise provided in the Certificate of
Incorporation or these By-Laws, each stockholder of record of the Corporation
shall, at every meeting of the stockholders of the Corporation, be entitled to
one (1) vote for each share of stock standing in his name on the books of the
Corporation on any matter on which he is entitled to vote, and such votes may be
cast either in person or by proxy, appointed by an instrument in writing,
subscribed by such stockholder or by his duly authorized attorney, and filed
with the Secretary before being voted on, but no proxy shall be voted after
three (3) years from its date, unless said proxy provides for a longer period.
If the Certificate of Incorporation provides for more or less than one (1) vote
for any share of capital stock of the Corporation, on any matter, then any and
every reference in these By-Laws to a majority or other proportion of capital
stock shall refer to such majority or other proportion of the votes of such
stock.
The vote on all elections of Directors and on any other questions
before the meeting need not be by ballot, except upon
<PAGE> 6
demand of any stockholder. When a quorum is present at any meeting of the
stockholders of the Corporation, the vote of the holders of a majority of the
capital stock entitled to vote at such meeting and present in person or
represented by proxy shall decide any question brought before such meeting,
unless the question is one upon which, under any provision of the laws of the
State of Delaware or of the Certificate of Incorporation, a different vote is
required in which case such provision shall govern and control the decision of
such question.
Section 7. Consent. Except as otherwise provided by the Certificate of
Incorporation, whenever the vote of the stockholders at a meeting thereof is
required or permitted to be taken in connection with any corporate action by any
provision of the laws of the State of Delaware or of the Certificate of
Incorporation, such corporate action may be taken without a meeting, without
prior notice and without a vote, if a consent in writing, setting forth the
action so taken, shall be signed by the holders of outstanding capital stock of
the Corporation having not less than the minimum number of votes that would be
necessary to authorize or take such action at a meeting at which all shares
entitled to vote thereon were present and voted. Prompt notice of the taking of
the corporate action without a meeting by less than unanimous written consent
shall be given to those stockholders who have not consented thereto in writing.
Section 8. Judges. At every meeting of the stockholders of the
Corporation at which a vote by ballot is taken, the polls shall be opened and
closed, the proxies and ballots shall be received and
<PAGE> 7
taken in charge, and all questions touching the qualifications of voters, the
validity of proxies and the acceptance or rejection of votes shall be decided
by, two (2) judges. Said judges shall be appointed by the Board of Directors
before the meeting, or, if no such appointment shall have been made, by the
presiding officer of the meeting. If for any reason any of the judges previously
appointed shall fail to attend or refuse or be unable to serve, judges in place
of any so failing to attend, or refusing or unable to service, shall be
appointed in like manner.
ARTICLE IV
Directors
Section 1. Number, Election and Term of Office. The business and
affairs of the Corporation shall be managed by the Board of Directors. The
number of Directors which shall constitute the whole Board shall be not less
than three (3) nor more than nine (9). Within such limits, the number of
Directors may be fixed from time to time by vote of the stockholders or of the
Board of Directors, at any regular or special meeting, subject to the provisions
of the Certificate of Incorporation. Directors need not be stockholders.
Directors shall be elected at the annual meeting of the stockholders of the
Corporation, except as provided in Section 2 of this Article, to serve until the
next annual meeting of stockholders and until their respective successors are
duly elected and have qualified.
In addition to the powers by these By-Laws expressly conferred upon
them, the Board may exercise all such powers of the Corporation as are not by
the laws of the State of Delaware, the
<PAGE> 8
Certificate of Incorporation or these By-Laws required to be exercised or done
by the stockholders.
Section 2. Vacancies and Newly Created Directorships. Except as
hereinafter provided, any vacancy in the office of a Director occurring for any
reason other than the removal of a Director pursuant to Section 3 of this
Article, and any newly created Directorship resulting from any increase in the
authorized number of Directors, may be filled by a majority of the Directors
then in office or by a sole remaining Director. In the event that any vacancy in
the office of a Director occurs as a result of the removal of a Director
pursuant to Section 3 of this Article, or in the event that vacancies occur
contemporaneously in the offices of all of the Directors, such vacancy or
vacancies shall be filled by the stockholders of the Corporation at a meeting of
stockholders called for the purpose. Directors chosen or elected as aforesaid
shall hold office until the next annual meeting of stockholders and until their
respective successors are duly elected and have qualified.
Section 3. Removals. At any meeting of stockholders of the Corporation
called for the purpose, the holders of a majority of the shares of capital stock
of the Corporation entitled to vote at such meeting may remove from office, with
or without cause, any or all of the Directors.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
may be held without notice at such time and place, either within or without the
State of Delaware, as shall from time to time be determined by resolution of the
Board.
<PAGE> 9
Section 5. Special Meetings. Special meetings of the Board of Directors
may be called by the Chairman of the Board, the President or any two Directors
on notice given to each Director, and such meetings shall be held at the
principal business office of the Corporation or at such other place or places,
either within or without the State of Delaware, as shall be specified in the
notices thereof.
Section 6. Annual Meetings. The first meeting of each newly elected
Board of Directors shall be held as soon as practicable after each annual
election of Directors and on the same day, at the same place at which regular
meetings of the Board of Directors are held, or at such other time and place as
may be provided by resolution of the Board. Such meeting may be held at any
other time or place which shall be specified in a notice given, as hereinafter
provided, for special meetings of the Board of Directors.
Section 7. Notice. Notice of any meeting of the Board of Directors
requiring notice shall be given to each Director by mailing the same at least
forty-eight (48) hours, or by personal delivery, telegram or telecopy at least
twenty-four (24) hours, before the time fixed for the meeting. Attendance of a
Director at a meeting shall constitute waiver of notice of such meeting, except
when such Director attends such meeting for the express purpose of objecting, at
the beginning of such meeting, to the transaction of any business because such
meeting is not lawfully called or convened.
Section 8. Quorum. At all meetings of the Board of Directors, the
presence of one-half or more of the Directors constituting the
<PAGE> 10
Board (but in no event less than two Directors) shall constitute a quorum for
the transaction of business. Except as may be otherwise specifically provided by
the laws of the State of Delaware, the Certificate of Incorporation or these
By-Laws, the affirmative vote of a majority of the Directors present at the time
of such vote shall be the act of the Board of Directors if a quorum is present.
If a quorum shall not be present at any meeting of the Board of Directors the
Directors present thereat may adjourn the meeting from time to time, without
notice other than announcement at the meeting, until a quorum shall be present.
The Chairman of the Board shall call to order meetings of the directors and
shall act as chairman of such meetings.
Section 9. Consent. Unless otherwise restricted by the Certificate of
Incorporation or these By-Laws, any action required or permitted to be taken at
any meeting of the Board of Directors may be taken without a meeting, if all
members of the Board consent thereto in writing, and the writing or writings are
filed with the minutes of proceedings of the Board.
Section 10. Telephonic Meetings. Unless otherwise restricted by the
Certificate of Incorporation or these By-Laws, members of the Board of Directors
may participate in a meeting of the board by means of conference telephone or
similar communications equipment by means of which all persons participating in
such meeting can hear each other, and participation in a meeting pursuant to
this Section 10 shall constitute presence in person at such meeting.
Section 11. Compensation of Directors. Directors, as such, shall not
receive any stated salary for their services, but, by
<PAGE> 11
resolution of the Board, a fixed sum and expenses of attendance, if any, may be
allowed for attendance at each regular or special meeting of the Board; provided
that nothing herein contained shall be construed to preclude any Director from
serving the Corporation in any other capacity and receiving compensation
therefor. Section
Section 12. Resignations. Any Director of the Corporation may resign at
any time by giving written notice to the Board of Directors or to the Chairman
of the Board, the President or the Secretary of the Corporation. Any such
resignation shall take effect at the time specified therein, or, if the time be
not specified, upon receipt thereof; and unless otherwise specified therein,
acceptance of such resignation shall not be necessary to make it effective.
ARTICLE V
Officers
Section 1. Number, Election and Term of Office. The officers of the
Corporation shall be a Chairman of the Board, Vice Chairman of the Board,
President, one or more Vice Presidents, a Secretary and a Treasurer, and may, at
the discretion of the Board of Directors, include any other officers and agents
as the interest of the Corporation may require. Any of the Chairman of the
Board, the Vice Chairman of the Board, the President, or any other officer of
the Corporation, or any combination of them, as authorized by the directors,
shall be the principal executive officer of the Corporation. The officers of the
Corporation shall be elected annually by the Board of Directors at its meeting
held immediately after the annual meeting of the stockholders, and shall hold
their
<PAGE> 12
respective offices until their successors are duly elected and have qualified.
Any number of offices may be held by the same person.
Section 2. Chairman of the Board. The Chairman of the Board shall
preside, when present, at all meetings of the Board of Directors and all
meetings of the stockholders and will perform such other duties as may from time
to time be assigned to him by the Board of Directors or these By-laws.
Section 2A. Vice Chairman of the Board. In the absence of the Chairman
of the Board or in the event of his death, inability or refusal to act, the Vice
Chairman of the Board shall perform the duties of the Chairman of the Board and,
when so acting, shall have all the powers of and be subject to all the
restrictions on the Chairman of the Board. The Vice Chairman of the Board shall
perform such other duties as may be prescribed from time to time by the Board or
these by-laws.
Section 3. President. The President shall have such powers and duties
as from time to time may be assigned to him by the Board of Directors or these
By-laws, and shall see that all orders and resolutions of the Board of Directors
and the stockholders are carried into effect. He shall have the general
authority to execute bonds, deeds, and contracts in the name of the Corporation
and affix the corporate seal thereto, and to sign stock certificates. Subject to
authorization and approval by the Board of Directors or pursuant to these
By-laws, he shall have the authority: to cause the employment or appointment of
such employees and agents of the Corporation as the proper conduct of operations
may require, and to fix their compensation; and to remove or suspend any
employee or
<PAGE> 13
agent who shall have been employed or appointed under his authority or under
authority of an officer subordinate to him.
Section 4. Vice Presidents. The Vice Presidents shall perform such
duties as the President or the Board of Directors shall require. Any Vice
President shall, during the absence or incapacity of the President, assume and
perform his duties.
Section 5. Secretary. The Secretary may sign all certificates of stock
of the Corporation. He shall record all the proceedings of the meetings of the
Board of Directors and of the stockholders of the Corporation in books to be
kept for that purpose. He shall have custody of the seal of the Corporation and
may affix the same to any instrument requiring such seal when authorized by the
Board of Directors, and when so affixed he may attest the same by his signature.
He shall keep the transfer books, in which all transfers of the capital stock of
the Corporation shall be registered, and the stock books which shall contain the
names and addresses of all holders of the capital stock of the Corporation and
the number of shares held by each; and he shall keep such stock and transfer
books open daily during business hours to the inspection of every stockholder
and for transfer of stock. He shall notify the Directors and stockholders of
their respective meetings as required by law or by these By-Laws, and shall
perform such other duties as may be required by law or by these By-Laws, or
which may be assigned to him from time to time by the Board of Directors.
Section 6. Treasurer. The Treasurer shall have charge of the funds and
securities of the Corporation. He may sign all certificates of stock. He shall
keep full and accurate accounts of all
<PAGE> 14
receipts and disbursements of the Corporation in books belonging to the
Corporation and shall deposit all monies; and other valuable effects in the name
and to the credit of the corporation in such depositories as may be designated
by the Board of Directors. He shall disburse the funds of the corporation as may
be ordered by the Board, and shall render to the President or the Directors,
whenever they may require it, an account of all his transactions as Treasurer
and an account of the business and financial position of the Corporation.
Section 7. Assistant Treasurers. The Assistant Treasurers shall, during
the absence or incapacity of the Treasurer, assume and perform all functions and
duties which the Treasurer might lawfully do if present and not under any
incapacity.
Section 8. Treasurer's Bond. The Treasurer and Assistant Treasurers
shall, if required so to do by the Board of Directors, each give a bond (which
shall be renewed every six (6) years) in such sum and with such surety or
sureties as the Board of Directors may require.
Section 9. Transfer of Duties. The Board of Directors in its absolute
discretion may transfer the power and duties, in whole or in part, of any
officer to any other officer, or persons, notwithstanding the provisions of
these By-Laws, except as otherwise provided by the laws of the State of
Delaware.
Section 10. Vacancies. If the office of Chairman of the Board,
President, Vice President, Secretary or Treasurer, or of any other officer or
agent becomes vacant for any reason, the Board of Directors may choose a
successor to hold office for the unexpired
<PAGE> 15
term.
Section 11. Removals. At any meeting of the Board of Directors called
for the purpose, any officer or agent of the Corporation may be removed from
office, with or without cause, by the affirmative vote of a majority of the
entire Board of Directors.
Section 12. Compensation of Officers. The officers shall receive such
salary or compensation as may be determined by the Board of Directors.
Section 13. Resignations. Any officer or agent of the Corporation may
resign at any time by giving written notice to the Board of Directors or to the
Chairman of the Board, the President or the Secretary of the Corporation. Any
such resignation shall take effect at the time specified therein or, if the time
be not specified, upon receipt thereof; and unless otherwise specified therein,
acceptance of such resignation shall not be necessary to make it effective.
ARTICLE VI
Contracts, Checks and Notes
Section 1. Contracts. Unless the Board of Directors shall otherwise
specifically direct, all contracts of the Corporation shall be executed in the
name of the Corporation by the Chairman of the Board or the President or a Vice
President.
Section 2. Checks and Notes. All checks, drafts, bills of exchange and
promissory notes and other negotiable instruments of the Corporation shall be
signed by such officers or agents of the Corporation as may be designated by the
Board of Directors.
ARTICLE VII
<PAGE> 16
Stocks
Section 1. Certificates of Stock. The certificates for shares of the
stock of the Corporation shall be in such form, not inconsistent with the
Certificate of Incorporation, as shall be prepared or approved by the Board of
Directors. Every holder of stock in the Corporation shall be entitled to have a
certificate signed by, or in the name of the Corporation by, the Chairman of the
Board, the President or a Vice President, and by the Treasurer or an Assistant
Treasurer or the Secretary or an Assistant Secretary certifying the number of
shares owned by him and the date of issue; and no certificate shall be valid
unless so signed. All certificates shall be consecutively numbered and shall be
entered in the books of the Corporation as they are issued. Where a certificate
is countersigned (1) by a transfer agent other than the Corporation or its
employee, or, (2) by a registrar other than the corporation or its employee, any
other signature on the certificate may be a facsimile. In case any officer,
transfer agent or registrar who has signed or whose facsimile signature has been
placed upon a certificate shall have ceased to be such officer, transfer agent
or registrar before such certificate is issued, it may be issued by the
Corporation with the same effect as if he were such officer, transfer agent or
registrar at the date of issue. All certificates surrendered to the Corporation
shall be cancelled and, except in the cases of lost or destroyed certificates,
no new certificates shall be issued until the former certificates for the same
number of shares of the same class of stock shall have been surrendered and
cancelled.
<PAGE> 17
Section 2. Transfer of Stock. Upon surrender to the Corporation or the
transfer agent of the Corporation of a certificate for shares duly endorsed or
accompanied by proper evidence of succession, assignment or authority to
transfer, it shall be the duty of the Corporation to issue a new certificate to
the person entitled thereto, cancel the old certificate and record the
transaction upon its books.
ARTICLE VIII
Registered Stockholders
The Corporation shall be entitled to treat the holder of record of any
share or shares of stock as the holder in fact thereof and, accordingly, shall
not be bound to recognize any equitable or other claim to, or interest in, such
share or shares on the part of any other person, whether or not it shall have
express or other notice thereof, save as expressly provided by the laws of the
State of Delaware.
ARTICLE IX
Lost Certificates
Any person claiming a certificate of stock to be lost or destroyed
shall make an affidavit or affirmation of the fact and advertise the same in
such manner as the Board of Directors may require, and the Board of Directors
may, in its discretion, require the owner of the lost or destroyed certificate,
or his
<PAGE> 18
legal representative, to give the Corporation a bond in a sum sufficient, in the
opinion of the Board of Directors, to indemnify the Corporation against any
claim that may be made against it on account of the alleged loss of any such
certificate. A new certificate of the same tenor and for the same number of
shares as the one alleged to be lost or destroyed may be issued without
requiring any bond when, in the judgment of the Directors, it is proper so to
do.
ARTICLE X
Fixing of Record Date
In order that the Corporation may determine the stockholders entitled
to notice of or to vote at any meeting of stockholders or any adjournment
thereof, or to express consent to corporate action in writing without a meeting,
or to receive payment of any dividend or other distribution or allotment of any
rights, or to exercise any rights in respect of any change, conversion or
exchange of stock or for the purpose of any other lawful action, the Board of
Directors may fix a record date, which record date shall not precede the date
upon which the resolution fixing the record date is adopted by the board of
directors, and which record date shall rot be more than sixty (60) nor less than
ten (10) days before the date of such meeting, nor more than sixty (60) days
prior to any other action. A determination of stockholders shall apply to any
adjournment of the meeting; provided, however, that the Board of Directors may
fix a new record date for the adjourned meeting.
ARTICLE XI
<PAGE> 19
Dividends
Subject to the relevant provisions of the Certificate of Incorporation,
dividends upon the capital stock of the Corporation may be declared by the Board
of Directors at any regular or special meeting, pursuant to law. Dividends may
be paid in cash, in property, or in shares of the capital stock of the
Corporation, subject to the provisions of the Certificate of Incorporation.
Before payment of any dividend, there may be set aside out of any funds of the
Corporation available for dividends such sums as the Directors from time to
time, in their absolute discretion, think proper as a reserve or reserves to
meet contingencies, or for equalizing dividends, or for repairing or maintaining
any property of the Corporation, or for such other purpose as the Directors
shall think conducive to the interest of the Corporation, and the Directors may
modify or abolish any such reserve in the manner in which it was created.
ARTICLE XII
Waiver of Notice
Whenever any notice whatever is required to be given by statute or
under the provisions of the Certificate of Incorporation or these By-Laws, a
waiver thereof in writing signed by the person or persons entitled to said
notice, whether before or after the time stated therein, shall be equivalent
thereto.
ARTICLE XIII
Seal
The corporate seal of the Corporation shall have inscribed thereon the
name of the Corporation, the year of its organization
<PAGE> 20
and the words "Corporate Seal of Delaware."
ARTICLE XIV
Amendments
Subject to the provisions of the Certificate of Incorporation, these
By-Laws may be altered, amended or repealed or new By-Laws may be adopted by the
stockholders or by the Board of Directors at any regular meeting of the
stockholders or of the Board of Directors or at any special meeting of the
stockholders or of the Board of Directors if notice of such alteration,
amendment or repeal of the By-Laws or of adoption of new By-Laws be contained in
the notice of such special meeting.
<PAGE> 1
EXHIBIT 4.1
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE 1 Page
Definitions and Incorporation by Reference
<S> <C> <C>
SECTION 1.01. Definitions ............................ 1
SECTION 1.02. Other Definitions ...................... 26
SECTION 1.03. Incorporation by Reference of Trust
Indenture Act ........................ 27
SECTION 1.04. Rules of Construction .................. 27
ARTICLE 2
The Securities
SECTION 2.01. Form and Dating ........................ 28
SECTION 2.02. Execution and Authentication ........... 29
SECTION 2.03. Registrar and Paying Agent ............. 29
SECTION 2.04. Paying Agent To Hold Money in Trust..... 30
SECTION 2.05. Securityholder Lists ................... 30
SECTION 2.06. Transfer and Exchange .................. 31
SECTION 2.07. Replacement Securities ................. 32
SECTION 2.08. Outstanding Securities ................. 32
SECTION 2.09. Temporary Securities ................... 33
SECTION 2.10. Cancellation ........................... 33
SECTION 2.11. Defaulted Interest ..................... 33
SECTION 2.12. CUSIP Number ........................... 33
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee ..................... 34
SECTION 3.02. Selection of Securities To Be
Redeemed ............................. 34
SECTION 3.03. Notice of Redemption ................... 34
SECTION 3.04. Effect of Notice of Redemption ......... 35
SECTION 3.05. Deposit of Redemption Price ............ 36
SECTION 3.06. Securities Redeemed in Part ............ 36
</TABLE>
<PAGE> 2
2
<TABLE>
<CAPTION>
Page
ARTICLE 4
Covenants
<S> <C> <C>
SECTION 4.01. Payment of Securities .................. 36
SECTION 4.02. SEC Reports ............................ 36
SECTION 4.03. Limitation on Indebtedness ............. 37
SECTION 4.04. Limitation on Preferred Stock
of Restricted Subsidiaries............ 39
SECTION 4.05. Limitation on Restricted Payments....... 40
SECTION 4.06. Limitation on Restrictions on Dis-
tributions from Restricted
Subsidiaries ......................... 43
SECTION 4.07. Limitation on Sales of Assets and
Subsidiary Stock ..................... 45
SECTION 4.08. Limitation on Affiliate
Transactions ......................... 49
SECTION 4.09. Limitation on the Sale or Issuance
of Capital Stock of Restricted
Subsidiaries ......................... 50
SECTION 4.10. Change of Control ...................... 50
SECTION 4.11. Limitation on Liens .................... 52
SECTION 4.12. Limitation on Sale/Leaseback
Transactions ......................... 52
SECTION 4.13. Limitation on Lines of Business ........ 53
SECTION 4.14. Future Guarantors ...................... 53
SECTION 4.15. Compliance Certificates ................ 53
SECTION 4.16. Further Instruments and Acts ........... 53
ARTICLE 5
Successor Company
SECTION 5.01. When Company May Merge or Transfer
Assets ............................... 54
ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default ...................... 56
SECTION 6.02. Acceleration ........................... 58
SECTION 6.03. Other Remedies ......................... 59
</TABLE>
<PAGE> 3
3
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 6.04. Waiver of Past Defaults ................ 59
SECTION 6.05. Control by Majority .................... 59
SECTION 6.06. Limitation on Suits .................... 60
SECTION 6.07. Rights of Holders to Receive Payment ... 60
SECTION 6.08. Collection Suit by Trustee ............. 61
SECTION 6.09. Trustee May File Proofs of Claim ....... 61
SECTION 6.10. Priorities ............................. 61
SECTION 6.11. Undertaking for Costs .................. 62
SECTION 6.12. Waiver of Stay or Extension Laws ....... 62
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee ...................... 62
SECTION 7.02. Rights of Trustee ...................... 64
SECTION 7.03. Individual Rights of Trustee ........... 64
SECTION 7.04. Trustee's Disclaimer ................... 64
SECTION 7.05. Notice of Defaults ..................... 65
SECTION 7.06. Reports by Trustee to Holders .......... 65
SECTION 7.07. Compensation and Indemnity ............. 65
SECTION 7.08. Replacement of Trustee ................. 66
SECTION 7.09. Successor Trustee by Merger ............ 67
SECTION 7.10. Eligibility; Disqualification .......... 68
SECTION 7.11. Preferential Collection of Claims
Against Company ...................... 68
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities;
Defeasance ........................... 68
SECTION 8.02. Conditions to Defeasance ............... 69
SECTION 8.03. Application of Trust Money ............. 71
SECTION 8.04. Repayment to Company ................... 71
SECTION 8.05. Indemnity for Government
Obligations .......................... 71
SECTION 8.06. Reinstatement .......................... 71
</TABLE>
<PAGE> 4
4
<TABLE>
<CAPTION>
Page
ARTICLE 9
Amendments
<S> <C> <C>
SECTION 9.01. Without Consent of Holders ............. 72
SECTION 9.02. With Consent of Holders ................ 73
SECTION 9.03. Compliance with Trust Indenture ........ 74
SECTION 9.04. Revocation and Effect of Consents
and Waivers .......................... 74
SECTION 9.05. Notation on or Exchange of
Securities ........................... 74
SECTION 9.06. Trustee To Sign Amendments ............. 75
SECTION 9.07. Payment for Consent .................... 75
ARTICLE 10
Subsidiary Guaranties
SECTION 10.01. Guaranties ............................ 75
SECTION 10.02. Limitation on Liability ............... 78
SECTION 10.03. Successors and Assigns ................ 78
SECTION 10.04. No Waiver ............................. 78
SECTION 10.05. Modification .......................... 78
SECTION 10.06. Release of Subsidiary Guarantor ....... 79
ARTICLE 11
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls .......... 79
SECTION 11.02. Notices ............................... 79
SECTION 11.03. Communication by Holders with Other
Holders ............................. 80
SECTION 11.04. Certificate and Opinion as to
Conditions Precedent ................ 80
SECTION 11.05. Statements Required in Certificate
or Opinion .......................... 81
SECTION 11.06. When Securities Disregarded ........... 81
SECTION 11.07. Rules by Trustee, Paying Agent and
Registrar ........................... 81
SECTION 11.08. Legal Holidays ........................ 81
SECTION 11.09. Governing Law ......................... 82
SECTION 11.10. No Recourse Against Others ............ 82
SECTION 11.11. Successors ............................ 82
</TABLE>
<PAGE> 5
5
<TABLE>
<CAPTION>
Page
<S> <C> <C>
SECTION 11.12. Multiple Originals .................... 82
SECTION 11.13. Table of Contents; Headings ........... 82
</TABLE>
Exhibit A - Form of Security
Rule 144A/Regulation S Appendix
<PAGE> 6
INDENTURE dated as of January 24, 1997,
between ELECTRONIC RETAILING SYSTEMS INTERNATIONAL,
INC., a Delaware corporation (the "Company"), and
UNITED STATES TRUST COMPANY OF NEW YORK, a trust
company with banking powers organized under the laws
of the State of New York, as trustee (the "Trustee").
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the Holders of the Company's 13
1/4% Senior Discount Notes Due 2004 (the "Initial Securities") and, if and when
issued pursuant to a registered exchange for Initial Securities, the Company's
13 1/4% Senior Discount Notes Due 2004 (the "Exchange Securities") and, if and
when issued pursuant to a private exchange for Initial Securities, the Company's
13 1/4% Senior Discount Notes Due 2004 (the "Private Exchange Securities",
together with the Exchange Securities and the Initial Securities, the
"Securities"):
ARTICLE 1
Definitions and Incorporation by Reference
SECTION 1.01. Definitions.
"Accreted Value" means, as of any date (the "Specified Date"),
the amount provided below for each $1,000 principal amount at maturity of Notes:
(i) if the Specified Date occurs on one of the following dates
(each, a "Semi-Annual Accrual Date"), the Accreted Value will equal the
amount set forth below for such Semi-Annual Accrual Date:
<TABLE>
<CAPTION>
SEMI-ANNUAL ACCRUAL DATE ACCRETED VALUE
------------------------ --------------
<S> <C>
August 1, 1997................................... $725.61
February 1, 1998................................. 773.68
August 1, 1998................................... 824.94
February 1, 1999................................. 879.59
August 1, 1999................................... 937.87
February 1, 2000................................. 1,000.00
</TABLE>
(ii) if the Specified Date occurs before the first Semi-Annual
Accrual Date, the Accreted Value will equal
<PAGE> 7
2
the sum of (a) the original issue price of a Unit and (b) an amount
equal to the product of (1) the Accreted Value for the first
Semi-Annual Accrual Date less such original issue price multiplied by
(2) a fraction, the numerator of which is the number of days from the
Issue Date to the Specified Date, using a 360-day year of 12 30-day
months, and the denominator of which is the number of days elapsed from
the Issue Date to the first Semi-Annual Accrual Date, using a 360-day
year of 12 30-day months;
(iii) if the Specified Date occurs between two Semi-Annual
Accrual Dates, the Accreted Value will equal the sum of (a) the
Accreted Value for the Semi-Annual Accrual Date immediately preceding
such Specified Date and (b) an amount equal to the product of (1) the
Accreted Value for the immediately following Semi-Annual Accrual Date
less the Accreted Value for the immediately preceding Semi-Annual
Accrual Date multiplied by (2) a fraction, the numerator of which is
the number of days from the immediately preceding Semi-Annual Accrual
Date to the Specified Date, using a 360-day year of 12 30-day months,
and the denominator of which is 180; or
(iv) if the Specified Date occurs after the last Semi-Annual
Accrual Date, the Accreted Value will equal $1,000.
"Additional Assets" means (i) any property or assets (other
than Indebtedness and Capital Stock) in a Related Business; (ii) the Capital
Stock of a Person that becomes a Restricted Subsidiary as a result of the
acquisition of such Capital Stock by the Company or another Restricted
Subsidiary; or (iii) Capital Stock constituting a minority interest in any
Person that at such time is a Restricted Subsidiary; provided, however, that any
such Restricted Subsidiary described in clauses (ii) or (iii) above is primarily
engaged in a Related Business.
"Affiliate" of any specified Person means any other Person,
directly or indirectly, controlling or controlled by or under direct or indirect
common control with such specified Person. For the purposes of this definition,
"control" when used with respect to any Person means the power to direct the
management and policies of such Person, directly or indirectly, whether through
the ownership of voting securities, by contract or otherwise;
<PAGE> 8
3
and the terms "controlling" and "controlled" have meanings correlative to the
foregoing; provided, however, that the CDA shall not be deemed to be an
Affiliate of the Company and its Subsidiaries. For purposes of Sections 4.05,
4.07 and 4.08 only, "Affiliate" shall also mean any beneficial owner of Capital
Stock representing 5% or more of the total voting power of the Voting Stock (on
a fully diluted basis) of the Company or of rights or warrants to purchase such
Capital Stock (whether or not currently exercisable) and any Person who would be
an Affiliate of any such beneficial owner pursuant to the first sentence hereof.
"Asset Disposition" means any sale, lease, transfer or other
disposition (or series of related sales, leases, transfers or dispositions) by
the Company or any Restricted Subsidiary, including any disposition by means of
a merger, consolidation or similar transaction (each referred to for the
purposes of this definition as a "disposition"), of (i) any shares of Capital
Stock of a Restricted Subsidiary (other than directors' qualifying shares or
shares required by applicable law to be held by a Person other than the Company
or a Restricted Subsidiary), (ii) all or substantially all the assets of any
division or line of business of the Company or any Restricted Subsidiary or
(iii) any other assets of the Company or any Restricted Subsidiary outside of
the ordinary course of business of the Company or such Restricted Subsidiary
(other than, in the case of (i), (ii) and (iii) above, (A) sales or other
dispositions of inventory, receivables and other assets in the ordinary course
of business, (B) a disposition by a Restricted Subsidiary to the Company or by
the Company or a Restricted Subsidiary to a Wholly Owned Subsidiary, (C) for
purposes of Section 4.07 only, a disposition that constitutes a Restricted
Payment permitted by Section 4.05, (D) a disposition of assets with a fair
market value of less than $100,000, (E) sales of the Company's electronic shelf
label systems to customers and leases, rentals or otherwise furnishing the use
of such systems to customers and (F) licenses or leases of any technology,
know-how, patents, processes, procedures, copyrights or other intellectual
property, and related escrow arrangements, for consideration equal to the fair
market value thereof, as determined in good faith by the Board of Directors (and
whether or not such consideration has been specifically allocated to such
license or lease)).
<PAGE> 9
4
"Attributable Debt" in respect of a Sale/Leaseback Transaction
means, as at the time of determination, the present value (discounted at the
interest rate borne by the Securities, compounded annually) of the total
obligations of the lessee for rental payments during the remaining term of the
lease included in such Sale/Leaseback Transaction (including any period for
which such lease has been extended).
"Average Life" means, as of the date of determination, with
respect to any Indebtedness or Preferred Stock, the quotient obtained by
dividing (i) the sum of the products of the numbers of years from the date of
determination to the dates of each successive scheduled principal payment of
such Indebtedness or redemption or similar payment with respect to such
Preferred Stock multiplied by the amount of such payment by (ii) the sum of all
such payments.
"Board of Directors" means the Board of Directors of the
Company or any committee thereof duly authorized to act on behalf of such Board.
"Business Day" means each day which is not a Legal Holiday.
"Capital Lease Obligations" means an obligation that is
required to be classified and accounted for as a capital lease for financial
reporting purposes in accordance with GAAP, and the amount of Indebtedness
represented by such obligation shall be the capitalized amount of such
obligation determined in accordance with GAAP; and the Stated Maturity thereof
shall be the date of the last payment of rent or any other amount due under such
lease prior to the first date upon which such lease may be terminated by the
lessee without payment of a penalty.
"Capital Stock" of any Person means any and all shares,
interests, rights to purchase, warrants, options, participation or other
equivalents of or interests in (however designated) equity of such Person,
including any Preferred Stock, but excluding any debt securities convertible
into such equity.
"CDA" means the Connecticut Development Authority.
<PAGE> 10
5
"CDA Note" means the Company's 7.4% Convertible Note (dated
August 12, 1994) in the aggregate principal amount of $5.0 million issued to the
CDA.
"Change of Control" means the occurrence of any of the
following events:
(i) any "person" (as such term is used in Sections 13(d) and
14(d) of the Exchange Act), other than one or more Permitted Holders,
is or becomes the beneficial owner (as defined in Rule 13d-3 and 13d-5
under the Exchange Act except that for purposes of this clause (i) such
person shall be deemed to have "beneficial ownership" of all shares
that any such person has the right to acquire, whether such right is
exercisable immediately or only after the passage of time), directly or
indirectly, of more than 35% of the total voting power of the Voting
Stock of the Company; provided, however, that the Permitted Holders
beneficially own (as defined in Rule 13d-3 and 13d-5 under the Exchange
Act), directly or indirectly, in the aggregate a lesser percentage of
the total voting power of the Voting Stock of the Company than such
other person and do not have the right or ability by voting power,
contract or otherwise to elect or designate for election a majority of
the Board of Directors (for the purposes of this clause (i), such other
person shall be deemed to beneficially own any Voting Stock of a
specified corporation held by a parent corporation, if such other
person is the beneficial owner (as defined in this clause (i)),
directly or indirectly, of more than 35% of the voting power of the
Voting Stock of such parent corporation and the Permitted Holders
beneficially own (as defined in this clause (i)), directly or
indirectly, in the aggregate a lesser percentage of the voting power of
the Voting Stock of such parent corporation and do not have the right
or ability by voting power, contract or otherwise to elect or designate
for election a majority of the board of directors of such parent
corporation);
(ii) during any period of two consecutive years, individuals
who at the beginning of such period constituted the Board of Directors
(together with any new directors whose election by such Board of
Directors or whose nomination for election by the shareholders of the
Company was approved by a vote of 66-2/3% of the directors of the
Company then still in office who were
<PAGE> 11
6
either directors at the beginning of such period or whose election or
nomination for election was previously so approved) cease for any
reason to constitute a majority of the Board of Directors then in
office; or
(iii) the merger or consolidation of the Company with or into
another Person or the merger of another Person with or into the
Company, or the sale of all or substantially all the assets of the
Company to another Person (other than a Person that is controlled by
the Permitted Holders), and, in the case of any such merger or
consolidation, the securities of the Company that are outstanding
immediately prior to such transaction and which represent 100% of the
aggregate voting power of the Voting Stock of the Company are changed
into or exchanged for cash, securities or property, unless pursuant to
such transaction such securities are changed into or exchanged for, in
addition to any other consideration, securities of the surviving Person
or transferee that represent, immediately after such transaction, at
least a majority of the aggregate voting power of the Voting Stock of
the surviving Person or transferee.
"Code" means the Internal Revenue Code of 1986, as amended.
"Common Stock" means the common stock, par value $.01 per
share, of the Company.
"Company" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor and, for
purposes of any provision contained herein and required by the TIA, each other
obligor on the indenture securities.
"Consolidated Interest Expense" means, for any period, the
total interest expense of the Company and its consolidated Restricted
Subsidiaries, plus, to the extent not included in such interest expense, and to
the extent incurred by the Company or its Restricted Subsidiaries, without
duplication, (i) interest expense attributable to capital leases and the
interest expense attributable to leases constituting part of a Sale/Leaseback
Transaction, (ii) amortization of debt discount and debt issuance cost, (iii)
capitalized interest, (iv) non-cash interest expenses, (v) commissions,
discounts and other fees and charges owed
<PAGE> 12
7
with respect to letters of credit and bankers' acceptance financing, (vi) net
costs associated with Hedging Obligations (including amortization of fees),
(vii) Preferred Stock dividends in respect of all Preferred Stock held by
Persons other than the Company or a Wholly Owned Subsidiary, (viii) interest
incurred in connection with Investments in discontinued operations, (ix)
interest accruing on any Indebtedness of any other Person to the extent such
Indebtedness is Guaranteed by (or secured by the assets of) the Company or any
Restricted Subsidiary and (x) the cash contributions to any employee stock
ownership plan or similar trust to the extent such contributions are used by
such plan or trust to pay interest or fees to any Person (other than the
Company) in connection with Indebtedness Incurred by such plan or trust.
"Consolidated Leverage Ratio" as of any date of determination
means the ratio of (i) the aggregate amount of Indebtedness of the Company and
its Restricted Subsidiaries as of the date of determination after giving effect
to any Indebtedness to be Incurred or discharged on the date of determination to
(ii) the aggregate amount of EBITDA for the four most recent fiscal quarters
ending at least 45 days prior to the date of determination (such four fiscal
quarters being herein called the "Reference Period"); provided, however, that
(1) if the Company or any Restricted Subsidiary has Incurred any Indebtedness
since the beginning of the Reference Period that remains outstanding or if the
transaction giving rise to the need to calculate the Consolidated Leverage Ratio
is an Incurrence of Indebtedness, or both, EBITDA for the Reference Period shall
be calculated after giving effect on a pro forma basis to such Indebtedness as
if such Indebtedness had been Incurred on the first day of the Reference Period,
(2) if the Company or any Restricted Subsidiary has repaid, repurchased,
defeased or otherwise discharged any Indebtedness since the beginning of the
Reference Period or if any Indebtedness is to be repaid, repurchased, defeased
or otherwise discharged (in each case other than Indebtedness Incurred under any
revolving credit facility unless such Indebtedness has been permanently repaid
and has not been replaced) on the date of the transaction giving rise to the
need to calculate the Consolidated Leverage Ratio, EBITDA for the Reference
Period shall be calculated on a pro forma basis as if such discharge had
occurred on the first day of the Reference Period and as if the Company or such
Restricted Subsidiary had not earned the interest income actually earned during
the Reference Period in respect of cash or Temporary Cash
<PAGE> 13
8
Investments used to repay, repurchase, defease or otherwise discharge such
Indebtedness, (3) if since the beginning of the Reference Period the Company or
any Restricted Subsidiary shall have made any Asset Disposition, the EBITDA for
the Reference Period shall be reduced by an amount equal to the EBITDA (if
positive) directly attributable to the assets which are subject to such Asset
Disposition for the Reference Period, or increased by an amount equal to the
EBITDA (if negative), directly attributable thereto for the Reference Period and
Consolidated Interest Expense for the Reference Period shall be reduced by an
amount equal to the Consolidated Interest Expense directly attributable to any
Indebtedness of the Company or any Restricted Subsidiary repaid, repurchased,
defeased or otherwise discharged with respect to the Company and its continuing
Restricted Subsidiaries in connection with such Asset Disposition for the
Reference Period (or, if the Capital Stock of any Restricted Subsidiary is sold,
the Consolidated Interest Expense for the Reference Period directly attributable
to the Indebtedness of such Restricted Subsidiary to the extent the Company and
its continuing Restricted Subsidiaries are no longer liable for such
Indebtedness after such sale), (4) if since the beginning of the Reference
Period the Company or any Restricted Subsidiary (by merger or otherwise) shall
have made an Investment in any Restricted Subsidiary (or any person which
becomes a Restricted Subsidiary) or an acquisition of assets, including any
acquisition of assets occurring in connection with a transaction requiring a
calculation to be made hereunder, which constitutes all or substantially all of
an operating unit of a business, EBITDA for the Reference Period shall be
calculated after giving pro forma effect thereto (including the Incurrence of
any Indebtedness) as if such Investment or acquisition occurred on the first day
of the Reference Period and (5) if since the beginning of the Reference Period
any Person (that subsequently became a Restricted Subsidiary or was merged with
or into the Company or any Restricted Subsidiary since the beginning of the
Reference Period) shall have made any Asset Disposition, any Investment or
acquisition of assets that would have required an adjustment pursuant to clause
(3) or (4) above if made by the Company or a Restricted Subsidiary during the
Reference Period, EBITDA for the Reference Period shall be calculated after
giving pro forma effect thereto as if such Asset Disposition, Investment or
acquisition occurred on the first day of the Reference Period. For purposes of
this definition, whenever pro forma effect is to be given to an acquisition of
assets, the amount of income or earnings
<PAGE> 14
9
relating thereto and the amount of Consolidated Interest Expenses associated
with any Indebtedness Incurred in connection therewith, the pro forma
calculations shall be determined in good faith by a responsible financial or
accounting Officer of the Company. If any Indebtedness bears a floating rate of
interest and is being given pro forma effect, the interest on such Indebtedness
shall be calculated as if the rate in effect on the date of determination had
been the applicable rate for the entire period (taking into account any Interest
Rate Agreement applicable to such Indebtedness if such Interest Rate Agreement
has a remaining term in excess of 12 months). In making any calculation of the
Consolidated Leverage Ratio for any period commencing prior to the Issue Date,
the Notes shall be deemed to have been issued on the first day of such period.
"Consolidated Net Income" means, for any period, the net
income of the Company and its consolidated Subsidiaries; provided, however, that
there shall not be included in such Consolidated Net Income:
(i) any net income of any Person (other than the Company) if
such Person is not a Restricted Subsidiary, except that (A) subject to
the exclusion contained in clause (iv) below, the Company's equity in
the net income of any such Person for such period shall be included in
such Consolidated Net Income up to the aggregate amount of cash
actually distributed by such Person during such period to the Company
or a Restricted Subsidiary as a dividend or other distribution
(subject, in the case of a dividend or other distribution paid to a
Restricted Subsidiary, to the limitations contained in clause (iii)
below) and (B) the Company's equity in a net loss of any such Person
for such period shall be included in determining such Consolidated Net
Income;
(ii) any net income (or loss) of any Person acquired by the
Company or a Subsidiary in a pooling of interests transaction for any
period prior to the date of such acquisition;
(iii) any net income of any Restricted Subsidiary if such
Restricted Subsidiary is subject to restrictions, directly or
indirectly, on the payment of dividends or the making of distributions
by such Restricted Subsidiary, directly or indirectly, to the Company,
<PAGE> 15
10
except that (A) subject to the exclusion contained in clause (iv)
below, the Company's equity in the net income of any such Restricted
Subsidiary for such period shall be included in such Consolidated Net
Income up to the aggregate amount of cash actually distributed by such
Restricted Subsidiary during such period to the Company or another
Restricted Subsidiary as a dividend or other distribution (subject, in
the case of a dividend or other distribution paid to another Restricted
Subsidiary, to the limitation contained in this clause) and (B) the
Company's equity in a net loss of any such Restricted Subsidiary for
such period shall be included in determining such Consolidated Net
Income;
(iv) any gain (but not loss) realized upon the sale or other
disposition of any assets of the Company or its consolidated
Subsidiaries (including pursuant to any sale-and-leaseback arrangement)
which is not sold or otherwise disposed of in the ordinary course of
business and any gain (but not loss) realized upon the sale or other
disposition of any Capital Stock of any Person;
(v) extraordinary gains or losses; and
(vi) the cumulative effect of a change in accounting
principles.
Notwithstanding the foregoing, for the purpose of Section 4.05 only, there shall
be excluded from Consolidated Net Income any dividends, repayments of loans or
advances or other transfers of assets from Unrestricted Subsidiaries to the
Company or a Restricted Subsidiary to the extent such dividends, repayments or
transfers increase the amount of Restricted Payments permitted under such
Section pursuant to clause (a)(3)(D) thereof.
"Consolidated Net Worth" means the total of the amounts shown
on the balance sheet of the Company and its consolidated Subsidiaries,
determined on a consolidated basis in accordance with GAAP, as of the end of the
most recent fiscal quarter of the Company ending at least 45 days prior to the
taking of any action for the purpose of which the determination is being made,
as (i) the par or stated value of all outstanding Capital Stock of the Company
plus (ii) paid-in capital or capital surplus relating to such Capital Stock plus
(iii) any retained earnings or earned
<PAGE> 16
11
surplus less (A) any accumulated deficit and (B) any amounts attributable to
Disqualified Stock.
"Currency Agreement" means in respect of a Person any foreign
exchange contract, currency swap agreement or other similar agreement as to
which such Person is a party or a beneficiary which is designed to protect such
Person against fluctuations in currency values.
"Default" means any event which is, or after notice or passage
of time or both would be, an Event of Default.
"Disqualified Stock" means, with respect to any Person, any
Capital Stock which by its terms (or by the terms of any security into which it
is convertible or for which it is exchangeable) or upon the happening of any
event (i) matures or is mandatorily redeemable pursuant to a sinking fund
obligation or otherwise, (ii) is convertible or exchangeable for Indebtedness or
Disqualified Stock or (iii) is redeemable at the option of the holder thereof,
in whole or in part, in each case on or prior to the first anniversary of the
Stated Maturity of the Securities; provided, however, that any Capital Stock
that would not constitute Disqualified Stock but for provisions thereof giving
holders thereof the right to require such Person to repurchase or redeem such
Capital Stock upon the occurrence of an "asset sale" or "change of control"
occurring prior to the first anniversary of the Stated Maturity of the
Securities shall not constitute Disqualified Stock if the "asset sale" or
"change of control" provisions applicable to such Capital Stock are not more
favorable to the holders of such Capital Stock than the provisions of Sections
4.07 and 4.10.
"EBITDA" for any period means the sum of Consolidated Net
Income, plus Consolidated Interest Expense plus the following to the extent
deducted in calculating such Consolidated Net Income: (a) all income tax expense
of the Company and its consolidated Restricted Subsidiaries, (b) depreciation
expense of the Company and its consolidated Restricted Subsidiaries, (c)
amortization expense of the Company and its consolidated Restricted Subsidiaries
(excluding amortization expense attributable to a prepaid cash item that was
paid in a prior period) and (d) all other non-cash charges of the Company and
its consolidated Restricted Subsidiaries (excluding any such non-cash charge to
the extent that it represents an accrual of or reserve
<PAGE> 17
12
for cash expenditures in any future period), in each case for such period.
Notwithstanding the foregoing, the provision for taxes based on the income or
profits of, and the depreciation and amortization and non-cash charges of, a
Restricted Subsidiary shall be added to Consolidated Net Income to compute
EBITDA only to the extent (and in the same proportion) that the net income of
such Restricted Subsidiary was included in calculating Consolidated Net Income
and only if a corresponding amount would be permitted at the date of
determination to be dividended to the Company by such Restricted Subsidiary
without prior approval (that has not been obtained), pursuant to the terms of
its charter and all agreements, instruments, judgments, decrees, orders,
statutes, rules and governmental regulations applicable to such Restricted
Subsidiary or its stockholders.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Foreign Subsidiary" means each Restricted Subsidiary not
created or organized in the United States or any state thereof and that conducts
substantially all of its operations outside of the United States.
"GAAP" means generally accepted accounting principles in the
United States of America as in effect as of the Issue Date, including those set
forth in (i) the opinions and pronouncements of the Accounting Principles Board
of the American Institute of Certified Public Accountants, (ii) statements and
pronouncements of the Financial Accounting Standards Board, (iii) such other
statements by such other entity as approved by a significant segment of the
accounting profession and (iv) the rules and regulations of the SEC governing
the inclusion of financial statements (including pro forma financial statements)
in periodic reports required to be filed pursuant to Section 13 of the Exchange
Act, including opinions and pronouncements in staff accounting bulletins and
similar written statements from the accounting staff of the SEC. All ratios and
computations based on GAAP contained in this Indenture shall be computed in
conformity with GAAP.
"Guarantee" means any obligation, contingent or otherwise, of
any Person directly or indirectly guaranteeing any Indebtedness of any other
Person and any obligation, direct or indirect, contingent or otherwise, of such
Person (i) to purchase or pay (or advance or supply funds for the purchase or
payment of) such Indebtedness or other
<PAGE> 18
13
obligation of such Person (whether arising by virtue of partnership
arrangements, or by agreements to keep-well, to purchase assets, goods,
securities or services, to take-or-pay or to maintain financial statement
conditions or otherwise) or (ii) entered into for the purpose of assuring in any
other manner the obligee of such Indebtedness of the payment thereof or to
protect such obligee against loss in respect thereof (in whole or in part);
provided, however, that the term "Guarantee" shall not include endorsements for
collection or deposit in the ordinary course of business. The term "Guarantee"
used as a verb has a corresponding meaning. The term "Guarantor" shall mean any
Person Guaranteeing any obligation.
"Hedging Obligations" of any Person means the obligations of
such Person pursuant to any Interest Rate Agreement or Currency Agreement.
"Holder" or "Securityholder" means the Person in whose name a
Security is registered on the Registrar's books.
"Incur" means issue, assume, Guarantee, incur or otherwise
become liable for; provided, however, that any Indebtedness or Capital Stock of
a Person existing at the time such Person becomes a Subsidiary (whether by
merger, consolidation, acquisition or otherwise) shall be deemed to be Incurred
by such Subsidiary at the time it becomes a Subsidiary. The term "Incurrence"
when used as a noun shall have a correlative meaning. The accretion of principal
of a non-interest bearing or other discount security shall not be deemed the
Incurrence of Indebtedness.
"Indebtedness" means, with respect to any Person on any date
of determination (without duplication):
(i) the principal of and premium (if any) in respect of (A)
indebtedness of such Person for money borrowed and (B) indebtedness
evidenced by notes, debentures, bonds or other similar instruments for
the payment of which such Person is responsible or liable;
(ii) all Capital Lease Obligations of such Person and all
Attributable Debt in respect of Sale/Leaseback Transactions entered
into by such Person;
(iii) all obligations of such Person issued or assumed as the
deferred purchase price of property, all
<PAGE> 19
14
conditional sale obligations of such Person and all obligations of such
Person under any title retention agreement (but excluding trade
accounts payable arising in the ordinary course of business);
(iv) all obligations of such Person for the reimbursement of
any obligor on any letter of credit, banker's acceptance or similar
credit transaction (other than obligations with respect to letters of
credit securing obligations (other than obligations described in
clauses (i) through (iii) above) entered into in the ordinary course of
business of such Person to the extent such letters of credit are not
drawn upon or, if and to the extent drawn upon, such drawing is
reimbursed no later than the tenth Business Day following payment on
the letter of credit);
(v) the amount of all obligations of such Person with respect
to the redemption, repayment or other repurchase of any Disqualified
Stock or, with respect to any Subsidiary of such Person, the
liquidation preference with respect to, any Preferred Stock (but
excluding, in each case, any accrued dividends);
(vi) all obligations of the type referred to in clauses (i)
through (v) of other Persons and all dividends of other Persons for the
payment of which, in either case, such Person is responsible or liable,
directly or indirectly, as obligor, guarantor or otherwise, including
by means of any Guarantee;
(vii) all obligations of the type referred to in clauses (i)
through (vi) of other Persons secured by any Lien on any property or
asset of such Person (whether or not such obligation is assumed by such
Person), the amount of such obligation being deemed to be the lesser of
the fair market value of such property or assets and the amount of the
obligation so secured; and
(viii) to the extent not otherwise included in this
definition, Hedging Obligations of such Person.
The amount of Indebtedness of any Person at any date shall be the outstanding
balance at such date of all unconditional obligations as described above and the
maximum liability, upon the occurrence of the contingency giving rise to the
obligation, of any contingent obligations at such date.
<PAGE> 20
15
"Indenture" means this Indenture as amended or supplemented
from time to time, including, without limitation, the provisions of the TIA that
are deemed to be a part of and govern this instrument and any supplemental
indenture, respectively.
"Interest Rate Agreement" means in respect of a Person any
interest rate swap agreement, interest rate cap agreement or other financial
agreement or arrangement designed to protect such Person against fluctuations in
interest rates.
"Investment" in any Person means any direct or indirect
advance, loan (other than advances to customers in the ordinary course of
business that are recorded as accounts receivable on the balance sheet of the
lender) or other extensions of credit (including by way of Guarantee or similar
arrangement) or capital contribution to (by means of any transfer of cash or
other property to others or any payment for property or services for the account
or use of others), or any purchase or acquisition of Capital Stock, Indebtedness
or other similar instruments issued by, such Person. For purposes of the
definition of "Unrestricted Subsidiary", the definition of "Restricted Payment"
and Section 4.05, (i) "Investment" shall include the portion (proportionate to
the Company's equity interest in such Subsidiary) of the fair market value of
the net assets of any Subsidiary of the Company at the time that such Subsidiary
is designated an Unrestricted Subsidiary; provided, however, that upon a
redesignation of such Subsidiary as a Restricted Subsidiary, the Company shall
be deemed to continue to have a permanent "Investment" in an Unrestricted
Subsidiary equal to an amount (if positive) equal to (x) the Company's
"Investment" in such Subsidiary at the time of such redesignation less (y) the
portion (proportionate to the Company's equity interest in such Subsidiary) of
the fair market value of the net assets of such Subsidiary at the time of such
redesignation; and (ii) any property transferred to or from an Unrestricted
Subsidiary shall be valued at its fair market value at the time of such
transfer, in each case as determined in good faith by the Board of Directors.
For purposes of the definitions of "Joint Venture", "Restricted Payment" and
"Permitted Investment" and Section 4.05, (a) "Investment" shall include the
portion (proportionate to the Company's equity interest in such Person) of the
fair market value of the net assets of any Person at the time that such Person
is designated a Joint Venture and (b) any property transferred
<PAGE> 21
16
to or from a Joint Venture shall be valued at its fair market value at the time
of such transfer, in each case as determined in good faith by the Board of
Directors.
"Issue Date" means the date on which the Securities are
originally issued.
"Joint Venture" means a Person (i) engaged in technology
development, manufacturing or distribution in a Related Business; (ii)
designated by the Company as a "Joint Venture Company" for purposes of this
Indenture; provided, however, that such designation would be permitted under
Section 4.05, and (iii) as to which the Company and the Restricted Subsidiaries
own at least 10% of the Voting Stock, such Joint Venture to be deemed to include
each Subsidiary of such Person.
"Lien" means any mortgage, pledge, security interest,
encumbrance, lien or charge of any kind (including any conditional sale or other
title retention agreement or lease in the nature thereof).
"Net Available Cash" from an Asset Disposition means cash
payments received therefrom (including any cash payments received by way of
deferred payment of principal pursuant to a note or installment receivable or
otherwise and proceeds from the sale or other disposition of any securities
received as consideration, but only as and when received, but excluding any
other consideration received in the form of assumption by the acquiring Person
of Indebtedness or other obligations relating to such properties or assets or
received in any other noncash form), in each case net of (i) all legal, title
and recording tax expenses, commissions and other fees and expenses incurred,
and all Federal, state, provincial, foreign and local taxes required to be
accrued as a liability under GAAP, as a consequence of such Asset Disposition,
(ii) all payments made on any Indebtedness which is secured by any assets
subject to such Asset Disposition, in accordance with the terms of any Lien upon
or other security agreement of any kind with respect to such assets, or which
must by its terms, or in order to obtain a necessary consent to such Asset
Disposition, or by applicable law, be repaid out of the proceeds from such Asset
Disposition, (iii) all distributions and other payments required to be made to
minority interest holders in Subsidiaries or joint ventures as a result of such
Asset Disposition and (iv) the deduction of appropriate amounts provided by the
seller as a reserve, in accordance with GAAP
<PAGE> 22
17
or, in the case of indemnity obligations, as deemed advisable by the Board of
Directors, against any liabilities associated with the property or other assets
disposed in such Asset Disposition and retained by the Company or any Restricted
Subsidiary after such Asset Disposition.
"Net Cash Proceeds", with respect to any issuance or sale of
Capital Stock, means the cash proceeds of such issuance or sale net of
attorneys' fees, accountants' fees, underwriters' or placement agents' fees,
discounts or commissions and brokerage, consultant and other fees actually
incurred in connection with such issuance or sale and net of taxes paid or
payable as a result thereof.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer, any Assistant Treasurer, the Secretary or any
Assistant Secretary of the Company.
"Officers' Certificate" means a certificate signed by two
Officers.
"Opinion of Counsel" means a written opinion from legal
counsel who is reasonably acceptable to the Trustee. The counsel may be an
employee of or counsel to the Company or the Trustee.
"Permitted Holders" means (i) Norton Garfinkle, Bruce F.
Failing, Jr., their respective spouses, issue or any spouse of their issue, (ii)
any Person controlled directly or indirectly by any one or more of the Persons
referred to in clause (i), (iii) any trust, all of the beneficiaries of which
are any one or more of the Persons referred to in clause (i), or (iv) any bona
fide legal representative of any of the individuals in clause (i) duly appointed
as a result of the death or legal incapacity of such individual.
"Permitted Investment" means an Investment by the Company or
any Restricted Subsidiary in (i) the Company, a Restricted Subsidiary or a
Person that will, upon the making of such Investment, become a Restricted
Subsidiary; provided, however, that the primary business of such Restricted
Subsidiary is a Related Business; (ii) another Person if as a result of such
Investment such other Person is merged or consolidated with or into, or
transfers or conveys all or substantially all its assets to, the Company or a
Restricted Subsidiary; provided, however, that such
<PAGE> 23
18
Person's primary business is a Related Business; (iii) Temporary Cash
Investments; (iv) receivables owing to the Company or any Restricted Subsidiary
if created or acquired in the ordinary course of business and payable or
dischargeable in accordance with customary trade terms; provided, however, that
such trade terms may include such concessionary trade terms as the Company or
any such Restricted Subsidiary deems reasonable under the circumstances; (v)
commission, payroll, travel and similar advances to cover matters that are
expected at the time of such advances ultimately to be treated as expenses for
accounting purposes and that are made in the ordinary course of business; (vi)
loans or advances to employees made in the ordinary course of business; (vii) a
Person arising as a result of any Hedging Obligations; (viii) stock, obligations
or securities received in settlement of debts created in the ordinary course of
business and owing to the Company or any Restricted Subsidiary or in
satisfaction of judgments; and (ix) any Person to the extent such Investment
represents the non-cash portion of the consideration received for an Asset
Disposition as permitted pursuant to Section 4.07.
"Permitted Liens" means, with respect to any Person, (a)
pledges or deposits by such Person under workers' compensation laws,
unemployment insurance laws or similar legislation, or good faith deposits in
connection with bids, tenders, contracts (other than for the payment of
Indebtedness) or leases to which such Person is a party, or deposits to secure
public or statutory obligations of such Person or deposits of cash or United
States government bonds to secure surety or appeal bonds to which such Person is
a party, or deposits as security for contested taxes or import duties or for the
payment of rent, in each case Incurred in the ordinary course of business; (b)
Liens imposed by law, such as carriers', warehousemen's and mechanics' Liens, in
each case for sums not yet due or being contested in good faith by appropriate
proceedings or other Liens arising out of judgments or awards against such
Person with respect to which such Person shall then be proceeding with an appeal
or other proceedings for review; (c) Liens for property taxes not yet subject to
penalties for non-payment or which are being contested in good faith by
appropriate proceedings; (d) Liens in favor of issuers of surety bonds or
letters of credit issued pursuant to the request of and for the account of such
Person in the ordinary course of its business; provided, however, that such
letters of credit do not constitute Indebtedness; (e) minor survey exceptions,
encumbrances, easements or reservations of, or rights of
<PAGE> 24
19
others for, licenses, rights-of-way, sewers, electric lines, telegraph and
telephone lines and other similar purposes, or zoning or other restrictions as
to the use of real property or Liens incidental to the conduct of the business
of such Person or to the ownership of its properties which were not Incurred in
connection with Indebtedness and which do not in the aggregate materially impair
their use in the operation of the business of such Person; (f) Liens securing
Indebtedness Incurred to finance the construction, purchase or lease of, or
repairs, improvements or additions to, property of such Person; provided,
however, that the Lien may not extend to any other property owned by such Person
or any of its Subsidiaries at the time the Lien is Incurred, and the
Indebtedness (other than any interest thereon) secured by the Lien may not be
Incurred more than 180 days after the later of the acquisition, completion of
construction, repair, improvement, addition or commencement of full operation of
the property subject to the Lien; (g) Liens to secure Indebtedness permitted
under Section 4.03(b)(1), but only to the extent secured by inventory or
accounts receivables and related assets; (h) Liens existing on the Issue Date;
(i) Liens on property or shares of Capital Stock of another Person at the time
such other Person becomes a Subsidiary of such Person; provided, however, that
such Liens are not created, incurred or assumed in connection with, or in
contemplation of, such other Person becoming such a Subsidiary; provided
further, however, that such Lien may not extend to any other property owned by
such Person or any of its Subsidiaries; (j) Liens on property at the time such
Person or any of its Subsidiaries acquires the property, including any
acquisition by means of a merger or consolidation with or into such Person or a
Subsidiary of such Person; provided, however, that such Liens are not created,
incurred or assumed in connection with, or in contemplation of, such
acquisition; provided further, however, that the Liens may not extend to any
other property owned by such Person or any of its Subsidiaries; (k) Liens
securing Indebtedness or other obligations of a Subsidiary of such Person owing
to such Person or a wholly owned Subsidiary of such Person; (l) Liens securing
Hedging Obligations so long as such Hedging Obligations relate to Indebtedness
that is, and is permitted to be under this Indenture, secured by a Lien on the
same property securing such Hedging Obligations; (m) Liens to secure any
Refinancing (or successive Refinancings) as a whole, or in part, of any
Indebtedness secured by any Lien referred to in the foregoing clauses (f), (g),
(h), (i) and (j); provided, however, that (x) such new Lien shall be limited to
all or
<PAGE> 25
20
part of the same property that secured the original Lien (plus improvements to
or on such property) and (y) the Indebtedness secured by such Lien at such time
is not increased to any amount greater than the sum of (A) the outstanding
principal amount or, if greater, committed amount of the Indebtedness described
under clauses (f), (g), (h), (i) or (j) at the time the original Lien became a
Permitted Lien and (B) an amount necessary to pay any fees and expenses,
including premiums, related to such refinancing, refunding, extension, renewal
or replacement; (n) Liens in favor of the Company or any Wholly-Owned Subsidiary
or Subsidiary Guarantor; (o) Liens arising from the rendering of a final
judgment or order against the Company or any Restricted Subsidiary that does not
give rise to an Event of Default; (p) Liens associated with leases and subleases
of real property that do not materially interfere with the ordinary conduct of
the business of the Company and any of its Restricted Subsidiaries and that are
made on customary and usual terms applicable to similar properties; and (q)
Liens consisting of licenses or leases of Property and related escrow
arrangements; provided, however, that such Liens shall not (except as described
under clause (h)) secure any Indebtedness of the Company or any Restricted
Subsidiary. Notwithstanding the foregoing, "Permitted Liens" will not include
any Lien described in clauses (f), (i) or (j) above to the extent such Lien
applies to any Additional Assets acquired directly or indirectly from Net
Available Cash pursuant to Section 4.07 unless the assets that were the subject
of the Asset Disposition giving rise to such Net Available Cash were subject to
Liens securing Indebtedness, in which event such Permitted Liens may secure
obligations in an amount not to exceed the amount of such Indebtedness. For
purposes of this definition, "Indebtedness" shall be deemed to include interest
on such Indebtedness.
"Person" means any individual, corporation, partnership,
limited liability company, joint venture, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"Preferred Stock", as applied to the Capital Stock of any
Person, means Capital Stock of any class or classes (however designated) which
is preferred as to the payment of dividends or distributions, or as to the
distribution of assets upon any voluntary or involuntary liquidation or
<PAGE> 26
21
dissolution of such Person, over shares of Capital Stock of any other class of
such Person.
"principal" of a Security means the principal of the Security
plus the premium, if any, payable on the Security which is due or overdue or is
to become due at the relevant time.
"Property" of any Person means all types of real, personal,
tangible or mixed property owned by such Person whether or not included in the
most recent consolidated balance sheet of such Person under GAAP.
"Refinance" means, in respect of any Indebtedness or Preferred
Stock, to refinance, extend, renew, refund, repay, prepay, redeem, defease or
retire, or to issue other Indebtedness or Preferred Stock in exchange or
replacement for, such Indebtedness or Preferred Stock. "Refinanced" and
"Refinancing" shall have correlative meanings.
"Refinancing Indebtedness" means Indebtedness that Refinances
any Indebtedness of the Company or any Restricted Subsidiary existing on the
Issue Date or Incurred in compliance with this Indenture, including Indebtedness
that Refinances Refinancing Indebtedness; provided, however, that (i) such
Refinancing Indebtedness has a Stated Maturity no earlier than the Stated
Maturity of the Indebtedness being Refinanced, (ii) such Refinancing
Indebtedness has an Average Life at the time such Refinancing Indebtedness is
Incurred that is equal to or greater than the Average Life of the Indebtedness
being Refinanced and (iii) such Refinancing Indebtedness has an aggregate
principal amount (or if Incurred with original issue discount, an aggregate
issue price) that is equal to or less than the aggregate principal amount (or if
Incurred with original issue discount, the aggregate accreted value) then
outstanding or committed (plus fees and expenses, including any premium and
defeasance costs) under the Indebtedness being Refinanced; provided further,
however, that Refinancing Indebtedness shall not include (x) Indebtedness of a
Subsidiary that Refinances Indebtedness of the Company or (y) Indebtedness of
the Company or a Restricted Subsidiary that Refinances Indebtedness of an
Unrestricted Subsidiary.
"Related Business" means any business related, ancillary or
complementary to the businesses of the Company and the Restricted Subsidiaries
on the Issue Date and any business utilizing any technology, know-how, patents,
<PAGE> 27
22
processes, copyrights or other intellectual property now or hereafter developed
by the Company or any Restricted Subsidiary.
"Restricted Payment" with respect to any Person means (i) the
declaration or payment of any dividends or any other distributions of any sort
in respect of its Capital Stock (including any payment in connection with any
merger or consolidation involving such Person) or similar payment to the direct
or indirect holders of its Capital Stock (other than dividends or distributions
payable solely in its Capital Stock (other than Disqualified Stock) and
dividends or distributions payable solely to the Company or a Restricted
Subsidiary, and other than pro rata dividends or other distributions made by a
Subsidiary that is not a Wholly Owned Subsidiary to minority stockholders (or
owners of an equivalent interest in the case of a Subsidiary that is an entity
other than a corporation)), (ii) the purchase, redemption or other acquisition
or retirement for value of any Capital Stock of the Company held by any Person
or of any Capital Stock of a Restricted Subsidiary held by any Affiliate of the
Company (other than a Restricted Subsidiary), including the exercise of any
option to exchange any Capital Stock (other than into Capital Stock of the
Company that is not Disqualified Stock), (iii) the purchase, repurchase,
redemption, defeasance or other acquisition or retirement for value, prior to
scheduled maturity, scheduled repayment or scheduled sinking fund payment of any
Subordinated Obligations (other than the purchase, repurchase, or other
acquisition of Subordinated Obligations purchased in anticipation of satisfying
a sinking fund obligation, principal installment or final maturity, in each case
due within one year of the date of acquisition) or (iv) the making of any
Investment in any Person (other than a Permitted Investment).
"Restricted Subsidiary" means any Subsidiary of the Company
that is not an Unrestricted Subsidiary.
"Sale/Leaseback Transaction" means an arrangement relating to
property now owned or hereafter acquired whereby the Company or a Restricted
Subsidiary transfers such property to a Person and the Company or a Restricted
Subsidiary leases it from such Person.
"SEC" means the Securities and Exchange Commission.
<PAGE> 28
23
"Securities" means the Securities issued under this Indenture.
"Senior Indebtedness" means (i) Indebtedness of the Company,
whether outstanding on the Issue Date or thereafter Incurred, and (ii) accrued
and unpaid interest (including interest accruing on or after the filing of any
petition in bankruptcy or for reorganization relating to the Company to the
extent post-filing interest is allowed in such proceeding) in respect of (A)
indebtedness of the Company for money borrowed and (B) indebtedness evidenced by
notes, debentures, bonds or other similar instruments for the payment of which
the Company is responsible or liable unless, in the case of (i) and (ii), in the
instrument creating or evidencing the same or pursuant to which the same is
outstanding it is provided that such obligations are subordinate in right of
payment to the Securities; provided, however, that Senior Indebtedness shall not
include (1) any obligation of the Company to any Subsidiary, (2) any liability
for Federal, state, local or other taxes owed or owing by the Company, (3) any
accounts payable or other liability to trade creditors arising in the ordinary
course of business (including guarantees thereof or instruments evidencing such
liabilities), (4) any Indebtedness of the Company (and any accrued and unpaid
interest in respect thereof) which is subordinate or junior in any respect to
any other Indebtedness or other obligation of the Company or (5) that portion of
any Indebtedness which at the time of Incurrence is Incurred in violation of
this Indenture.
"Significant Subsidiary" means any Restricted Subsidiary that
would be a "Significant Subsidiary" of the Company within the meaning of Rule
1-02 under Regulation S-X promulgated by the SEC.
"Stated Maturity" means, with respect to any security, the
date specified in such security as the fixed date on which the final payment of
principal of such security is due and payable, including pursuant to any
mandatory redemption provision (but excluding any provision providing for the
repurchase of such security at the option of the holder thereof upon the
happening of any contingency beyond the control of the issuer unless such
contingency has occurred).
"Subordinated Obligation" means any Indebtedness of the
Company (whether outstanding on the Issue Date or thereafter Incurred) which is
subordinate or junior in right
<PAGE> 29
24
of payment to the Securities pursuant to a written agreement to that effect.
"Subsidiary" means, in respect of any Person, any corporation,
association, partnership or other business entity of which more than 50% of the
total voting power of shares of Capital Stock or other interests (including
partnership interests) entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof
is at the time owned or controlled, directly or indirectly, by (i) such Person,
(ii) such Person and one or more Subsidiaries of such Person or (iii) one or
more Subsidiaries of such Person.
"Subsidiary Guarantor" means any Subsidiary which, pursuant to
the terms hereof, has executed a supplemental indenture in a form reasonably
satisfactory to the Trustee and become bound by the terms hereof, including
Article 10 hereof.
"Subsidiary Guaranty" means the Guarantee by a Subsidiary
Guarantor of the Company's obligations with respect to the Securities contained
in Article 10 hereof.
"Temporary Cash Investments" means any of the following: (i)
any investment in direct obligations of the United States of America or any
agency thereof or obligations guaranteed by the United States of America or any
agency thereof, (ii) investments in time deposit accounts, certificates of
deposit and money market deposits maturing within 180 days of the date of
acquisition thereof issued by a bank or trust company which is organized under
the laws of the United States of America, any state thereof or any foreign
country recognized by the United States of America, and which bank or trust
company has capital, surplus and undivided profits aggregating in excess of
$50,000,000 (or the foreign currency equivalent thereof) and has outstanding
debt that is rated "A" (or such similar equivalent rating) or higher by at least
one nationally recognized statistical rating organization (as defined in Rule
436 under the Securities Act) or any money-market fund sponsored by a registered
broker dealer or mutual fund distributor, (iii) repurchase obligations with a
term of not more than 30 days for underlying securities of the types described
in clause (i) above entered into with a bank meeting the qualifications
described in clause (ii) above, (iv) investments in commercial paper, maturing
not more than 90 days after the date of acquisition, issued by a
<PAGE> 30
25
corporation (other than an Affiliate of the Company) organized and in existence
under the laws of the United States of America or any foreign country recognized
by the United States of America with a rating at the time as of which any
investment therein is made of "P-1" (or higher) according to Moody's Investors
Service, Inc. or "A-1" (or higher) according to Standard and Poor's Ratings
Group, and (v) investments in securities with maturities of six months or less
from the date of acquisition issued or fully guaranteed by any state,
commonwealth or territory of the United States of America, or by any political
subdivision or taxing authority thereof, and rated at least "A" by Standard &
Poor's Ratings Group or "A" by Moody's Investors Service, Inc.; provided,
however, that in the case of the net proceeds from the sale of the Units, the
time periods set forth in (ii), (iii), (iv) and (v) shall be two years.
"TIA" means the Trust Indenture Act of 1939, as amended (15
U.S.C. Sections 77aaa-77bbbb), as in effect on the date of this Indenture,
except as provided in Section 9.03.
"Trustee" means the party named as such in this Indenture
until a successor replaces it and, thereafter, means the successor.
"Trust Officer" means the Chairman of the Board, the President
or any other officer or assistant officer of the Trustee assigned by the Trustee
to administer its corporate trust matters.
"Uniform Commercial Code" means the New York Uniform
Commercial Code as in effect from time to time.
"Units" means the Units sold by the Company consisting of the
Initial Securities and certain warrants to purchase Common Stock.
"Unrestricted Subsidiary" means (i) any Subsidiary of the
Company that at the time of determination shall be designated an Unrestricted
Subsidiary by the Board of Directors in the manner provided below and (ii) any
Subsidiary of an Unrestricted Subsidiary. The Board of Directors may designate
any Subsidiary of the Company (including any newly acquired or newly formed
Subsidiary of the Company) to be an Unrestricted Subsidiary unless such
Subsidiary or any of its Subsidiaries owns any Capital Stock or Indebtedness of,
or owns or holds any Lien on any property of, the Company or any other
Subsidiary of the
<PAGE> 31
26
Company that is not a Subsidiary of the Subsidiary to be so designated;
provided, however, that either (A) the Subsidiary to be so designated has total
assets of $1,000 or less or (B) if such Subsidiary has assets greater than
$1,000, such designation would be permitted under Section 4.05. The Board of
Directors may designate any Unrestricted Subsidiary to be a Restricted
Subsidiary; provided, however, that immediately after giving effect to such
designation (x) the Company could Incur $1.00 of additional Indebtedness under
Section 4.03(a) and (y) no Default shall have occurred and be continuing. Any
such designation by the Board of Directors shall be evidenced to the Trustee by
promptly filing with the Trustee a copy of the resolution of the Board of
Directors giving effect to such designation and an Officers' Certificate
certifying that such designation complied with the foregoing provisions.
"U.S. Government Obligations" means direct obligations (or
certificates representing an ownership interest in such obligations) of the
United States of America (including any agency or instrumentality thereof) for
the payment of which the full faith and credit of the United States of America
is pledged and which are not callable or redeemable at the issuer's option.
"Voting Stock" of a Person means all classes of Capital Stock
or other interests (including partnership interests) of such Person then
outstanding and normally entitled (without regard to the occurrence of any
contingency) to vote in the election of directors, managers or trustees thereof.
"Wholly Owned Subsidiary" means a Restricted Subsidiary all
the Capital Stock of which (other than directors' qualifying shares) is owned by
the Company or one or more Wholly Owned Subsidiaries.
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- -------
<S> <C>
"Affiliate Transaction" ................ 4.08
"Bankruptcy Law" ....................... 6.01
"covenant defeasance option" ........... 8.01(b)
"Custodian" ............................ 6.01
"Event of Default" ..................... 6.01
</TABLE>
<PAGE> 32
27
<TABLE>
<CAPTION>
Defined in
Term Section
---- -------
<S> <C>
"legal defeasance option" .............. 8.01(b)
"Legal Holiday" ........................ 13.08
"Offer" ............................... 4.07(b)
"Offer Amount" ........................ 4.07(c)(2)
"Offer Period" ........................ 4.07(c)(2)
"Paying Agent" ......................... 2.03
"Purchase Date" ....................... 4.07(c)(1)
"Registrar"............................. 2.03
"Successor Company" .................... 5.01
</TABLE>
SECTION 1.03. Incorporation by Reference of Trust Indenture
Act. This Indenture is subject to the mandatory provisions of the TIA which are
incorporated by reference in and made a part of this Indenture. The following
TIA terms have the following meanings:
"Commission" means the SEC;
"indenture securities" means the Securities;
"indenture security holder" means a Securityholder;
"indenture to be qualified" means this Indenture;
"indenture trustee" or "institutional trustee" means the
Trustee; and
"obligor" on the indenture securities means the Company and
any other obligor on the indenture securities, including any Subsidiary
Guarantor.
All other TIA terms used in this Indenture that are defined by
the TIA, defined by the TIA by reference to another statute or defined by SEC
rule have the meanings assigned to them by such definitions.
SECTION 1.04. Rules of Construction. Unless the context
otherwise requires:
(1) a defined term has the meaning assigned to it;
(2) an accounting term not otherwise defined has the meaning
assigned to it in accordance with GAAP;
(3) "or" is not exclusive;
<PAGE> 33
28
(4) "including" means including without limitation;
(5) words in the singular include the plural and
words in the plural include the singular;
(6) unsecured Indebtedness shall not be deemed to be
subordinate or junior to Secured Indebtedness merely by virtue of its
nature as unsecured Indebtedness;
(7) the principal amount of any noninterest bearing or other
discount security at any date shall be the principal amount thereof
that would be shown on a balance sheet of the issuer dated such date
prepared in accordance with GAAP;
(8) the principal amount of any Preferred Stock shall be (i)
the maximum liquidation value of such Preferred Stock or (ii) the
maximum mandatory redemption or mandatory repurchase price with respect
to such Preferred Stock, whichever is greater; and
(9) all references to the date the Securities were originally
issued shall refer to the date the Initial Securities were originally
issued.
ARTICLE 2
The Securities
SECTION 2.01. Form and Dating. Provisions relating to the
Initial Securities, the Private Exchange Securities and the Exchange Securities
are set forth in the Rule 144A/Regulation S Appendix attached hereto (the
"Appendix") which is hereby incorporated in and expressly made part of this
Indenture. The Initial Securities and the Trustee's certificate of
authentication shall be substantially in the form of Exhibit 1 to the Appendix
(with such appropriate insertions, omissions, substitutions and other variations
as are required by this Indenture) which is hereby incorporated in and expressly
made a part of this Indenture. The Exchange Securities, the Private Exchange
Securities and the Trustee's certificate of authentication shall be
substantially in the form of Exhibit A (with such appropriate insertions,
omissions, substitutions and other variations as are required by this
Indenture), which is hereby incorporated in and expressly made a part of this
<PAGE> 34
29
Indenture. The Securities may have notations, legends or endorsements required
by law, stock exchange rule, agreements to which the Company is subject, if any,
or usage (provided that any such notation, legend or endorsement is in a form
acceptable to the Company). Each Security shall be dated the date of its
authentication. The terms of the Securities set forth in the Appendix and
Exhibit A are part of the terms of this Indenture.
SECTION 2.02. Execution and Authentication. Two Officers shall
sign the Securities for the Company by manual or facsimile signature. The
Company's seal shall be impressed, affixed, imprinted or reproduced on the
Securities and may be in facsimile form.
If an Officer whose signature is on a Security no longer holds
that office at the time the Trustee authenticates the Security, the Security
shall be valid nevertheless.
A Security shall not be valid until an authorized signatory of
the Trustee manually signs the certificate of authentication on the Security.
The signature shall be conclusive evidence that the Security has been
authenticated under this Indenture.
The Trustee shall authenticate and deliver Securities for
original issue upon a written order of the Company signed by two Officers or by
an Officer and either an Assistant Treasurer or an Assistant Secretary of the
Company. Such order shall specify the amount of the Securities to be
authenticated and the date on which the original issue of Securities is to be
authenticated. The aggregate principal amount of Securities outstanding at any
time may not exceed that amount except as provided in Section 2.07.
The Trustee may appoint an authenticating agent acceptable to
the Company to authenticate the Securities. Unless limited by the terms of such
appointment, an authenticating agent may authenticate Securities whenever the
Trustee may do so. Each reference in this Indenture to authentication by the
Trustee includes authentication by such agent. An authenticating agent has the
same rights as any Registrar or Paying Agent.
SECTION 2.03. Registrar and Paying Agent. The Company shall
maintain an office or agency where Securities
<PAGE> 35
30
may be presented for registration of transfer or for exchange (the "Registrar")
and an office or agency where Securities may be presented for payment (the
"Paying Agent"). The Registrar shall keep a register of the Securities and of
their transfer and exchange. The Company may have one or more co-registrars and
one or more additional paying agents. The term "Paying Agent" includes any
additional paying agent.
The Company shall enter into an appropriate agency agreement
with any Registrar, Paying Agent or co-registrar not a party to this Indenture,
which shall incorporate the terms of the TIA. The agreement shall implement the
provisions of this Indenture that relate to such agent. The Company shall notify
the Trustee of the name and address of any such agent. If the Company fails to
maintain a Registrar or Paying Agent, the Trustee shall act as such and shall be
entitled to appropriate compensation therefor pursuant to Section 7.07. The
Company or any of its domestically incorporated Wholly Owned Subsidiaries may
act as Paying Agent, Registrar, co-registrar or transfer agent.
The Company initially appoints the Trustee as Registrar and
Paying Agent in connection with the Securities.
SECTION 2.04. Paying Agent To Hold Money in Trust. On or prior
to each due date of the principal and interest on any Security, the Company
shall deposit with the Paying Agent a sum sufficient to pay such principal and
interest when so becoming due. The Company shall require each Paying Agent
(other than the Trustee) to agree in writing that the Paying Agent shall hold in
trust for the benefit of Securityholders or the Trustee all money held by the
Paying Agent for the payment of principal of or interest on the Securities and
shall notify the Trustee of any default by the Company in making any such
payment. If the Company or a Subsidiary acts as Paying Agent, it shall segregate
the money held by it as Paying Agent and hold it as a separate trust fund. The
Company at any time may require a Paying Agent to pay all money held by it to
the Trustee and to account for any funds disbursed by the Paying Agent. Upon
complying with this Section , the Paying Agent shall have no further liability
for the money delivered to the Trustee.
SECTION 2.05. Securityholder Lists. The Trustee shall preserve
in as current a form as is reasonably prac-
<PAGE> 36
31
ticable the most recent list available to it of the names and addresses of
Securityholders. If the Trustee is not the Registrar, the Company shall furnish
to the Trustee, in writing on or before each interest payment date and at such
other times as the Trustee may request in writing, a list in such form and as of
such date as the Trustee may reasonably require of the names and addresses of
Securityholders.
SECTION 2.06. Transfer and Exchange. The Securities shall be
issued in registered form and shall be transferable only upon the surrender of a
Security for registration of transfer. When Securities are presented to the
Registrar or a co-registrar with a request (i) to register a transfer or (ii) to
exchange them for an equal principal amount of Securities of other
denominations, the Registrar shall register the transfer or make the transfer,
as requested if the requirements of Section 8-401(1) of the Uniform Commercial
Code are met; provided, however, that any Security presented or surrendered for
registration of transfer or exchange shall be duly endorsed or accompanied by a
written instrument of transfer in form satisfactory to the Registrar and the
Trustee duly executed by the Holder thereof or by his attorney duly authorized
in writing. To permit registration of transfers and exchanges, the Company shall
execute and the Trustee shall authenticate Securities at the Registrar's or
co-registrar's request. The Company may require payment of a sum sufficient to
pay all taxes, assessments or other governmental charges in connection with any
transfer or exchange pursuant to this Section . The Company shall not be
required to make and the Registrar need not register transfers or exchanges of
Securities selected for redemption (except, in the case of Securities to be
redeemed in part, the portion thereof not to be redeemed) or any Securities for
a period of 15 days before a selection of Securities to be redeemed or 15 days
before an interest payment date.
Prior to the due presentation for registration of transfer of
any Security, the Company, the Trustee, the Paying Agent, the Registrar or any
co-registrar may deem and treat the person in whose name a Security is
registered as the absolute owner of such Security for the purpose of receiving
payment of principal of and interest on such Security and for all other purposes
whatsoever, whether or not such Security is overdue, and none of the Company,
the Trustee, the Paying Agent, the Registrar or any co-registrar shall be
affected by notice to the contrary.
<PAGE> 37
32
All Securities issued upon any transfer or exchange pursuant
to the terms of this Indenture will evidence the same debt and will be entitled
to the same benefits under this Indenture as the Securities surrendered upon
such transfer or exchange.
SECTION 2.07. Replacement Securities. If a mutilated Security
is surrendered to the Registrar or if the Holder of a Security claims that the
Security has been lost, destroyed or wrongfully taken, the Company shall issue
and the Trustee shall authenticate and deliver a replacement Security if the
requirements of Section 8-405 of the Uniform Commercial Code are met and the
Holder satisfies any other reasonable requirements of the Trustee. If required
by the Trustee or the Company, such Holder shall furnish an indemnity bond
sufficient in the judgment of the Company and the Trustee to protect the
Company, the Trustee, the Paying Agent, the Registrar and any co-registrar from
any loss which any of them may suffer if a Security is replaced. The Company and
the Trustee may charge the Holder for their expenses in replacing a Security.
Every replacement Security is an additional obligation of the
Company.
SECTION 2.08. Outstanding Securities. Securities outstanding
at any time are all Securities authenticated by the Trustee except for those
canceled by it, those delivered to it for cancellation and those described in
this Section as not outstanding. A Security does not cease to be outstanding
because the Company or an Affiliate of the Company holds the Security.
If a Security is replaced pursuant to Section 2.07, it ceases
to be outstanding unless the Trustee and the Company receive proof satisfactory
to them that the replaced Security is held by a bona fide purchaser.
If the Paying Agent segregates and holds in trust, in
accordance with this Indenture, on a redemption date or maturity date money
sufficient to pay all principal and interest payable on that date with respect
to the Securities (or portions thereof) to be redeemed or maturing, as the case
may be, then on and after that date, such Securities (or portions thereof) shall
cease to be outstanding and interest on them shall cease to accrue.
<PAGE> 38
33
SECTION 2.09. Temporary Securities. Until definitive
Securities are ready for delivery, the Company may prepare and the Trustee shall
authenticate and deliver temporary Securities. Temporary Securities shall be
substantially in the form of definitive Securities but may have variations that
the Company and the Trustee considers appropriate for temporary Securities.
Without unreasonable delay, the Company shall prepare and the Trustee shall
authenticate definitive Securities and deliver them in exchange for temporary
Securities.
SECTION 2.10 Cancellation. The Company at any time may deliver
Securities to the Trustee for cancellation. The Registrar and the Paying Agent
shall forward to the Trustee any Securities surrendered to them for registration
of transfer, exchange or payment. The Trustee and no one else shall cancel and
destroy (subject to the record retention requirements of the Exchange Act) all
Securities surrendered for registration of transfer, exchange, payment or
cancellation and deliver a certificate of such destruction to the Company unless
the Company directs the Trustee to deliver canceled Securities to the Company.
The Company may not issue new Securities to replace Securities it has redeemed,
paid or delivered to the Trustee for cancellation.
SECTION 2.11. Defaulted Interest. If and to the extent the
Company defaults in a payment of interest on the Securities, the Company shall
pay defaulted interest (plus interest on such defaulted interest to the extent
lawful) in any lawful manner. The Company may pay the defaulted interest to the
persons who are Securityholders on a subsequent special record date. The Company
shall fix or cause to be fixed any such special record date and payment date to
the reasonable satisfaction of the Trustee and shall promptly mail to each
Securityholder a notice that states the special record date, the payment date
and the amount of defaulted interest to be paid.
SECTION 2.12. CUSIP Numbers. The Company in issuing the
Securities may use "CUSIP" numbers (if then generally in use) and, if so, the
Trustee shall use "CUSIP" numbers in notices of redemption as a convenience to
Holders; provided, however, that any such notice may state that no
representation is made as to the correctness of such numbers either as printed
on the Securities or as contained in any notice of a redemption and that
reliance may be placed only on the other identification numbers printed on
<PAGE> 39
34
the Securities, and any such redemption shall not be affected by any defect in
or omission of such numbers.
ARTICLE 3
Redemption
SECTION 3.01. Notices to Trustee. If the Company elects to
redeem Securities pursuant to paragraph 5 of the Securities, it shall notify the
Trustee in writing of the redemption date, the principal amount at maturity of
Securities to be redeemed and the paragraph of the Securities pursuant to which
the redemption will occur.
The Company shall give each notice to the Trustee provided for
in this Section at least 60 days before the redemption date unless the Trustee
consents to a shorter period.
SECTION 3.02. Selection of Securities To Be Redeemed. If fewer
than all the Securities are to be redeemed, the Trustee shall select the
Securities to be redeemed pro rata or by lot or by a method that complies with
applicable legal and securities exchange requirements, if any, and that the
Trustee shall deem to be fair and appropriate and in accordance with methods
generally used at the time of selection by fiduciaries in similar circumstances.
The Trustee shall make the selection from outstanding Securities not previously
called for redemption. The Trustee may select for redemption portions of the
principal of Securities that have denominations larger than $1,000. Securities
and portions of them the Trustee selects shall be in amounts of $1,000 or a
whole multiple of $1,000. Provisions of this Indenture that apply to Securities
called for redemption also apply to portions of Securities called for
redemption. The Trustee shall notify the Company promptly of the Securities or
portions of Securities to be redeemed.
SECTION 3.03. Notice of Redemption. At least 30 days but not
more than 60 days before a date for redemption of Securities, the Company shall
mail a notice of redemption by first-class mail to each Holder of Securities to
be redeemed at such Holder's registered address.
<PAGE> 40
35
The notice shall identify the Securities to be redeemed and
shall state:
(1) the redemption date;
(2) the redemption price;
(3) the name and address of the Paying Agent;
(4) that Securities called for redemption must be
surrendered to the Paying Agent to collect the redemption
price;
(5) if fewer than all the outstanding Securities
are to be redeemed, the identification and principal
amounts at maturity of the particular Securities to be
redeemed;
(6) that, unless the Company defaults in making such
redemption payment or the Paying Agent is prohibited from making such
payment pursuant to the terms of this Indenture, interest on Securities
(or portion thereof) called for redemption ceases to accrue on and
after the redemption date;
(7) the paragraph of the Securities pursuant to
which the Securities called for redemption are being
redeemed; and
(8) that no representation is made as to the correctness or
accuracy of the CUSIP number, if any, listed in such notice or printed
on the Securities.
At the Company's request, the Trustee shall give the notice of
redemption in the Company's name and at the Company's expense. In such event,
the Company shall provide the Trustee with the information required by this
Section.
SECTION 3.04. Effect of Notice of Redemption. Once notice of
redemption is mailed, Securities called for redemption become due and payable on
the redemption date and at the redemption price stated in the notice. Upon
surrender to the Paying Agent, such Securities shall be paid at the redemption
price stated in the notice, plus accrued interest to the redemption date.
Failure to give notice or any defect in the notice to any Holder shall not
affect the validity of the notice to any other Holder.
<PAGE> 41
36
SECTION 3.05. Deposit of Redemption Price. On or prior to
10:00 a.m. Eastern Time, on the redemption date, the Company shall deposit with
the Paying Agent (or, if the Company or a Subsidiary is the Paying Agent, shall
segregate and hold in trust) money sufficient to pay the redemption price of and
accrued interest on all Securities to be redeemed on that date other than
Securities or portions of Securities called for redemption which have been
delivered by the Company to the Trustee for cancellation.
SECTION 3.06. Securities Redeemed in Part. Upon surrender of a
Security that is redeemed in part, the Company shall execute and the Trustee
shall authenticate and deliver to the Holder (at the Company's expense) a new
Security equal in principal amount at maturity to the unredeemed portion of the
Security surrendered.
ARTICLE 4
Covenants
SECTION 4.01. Payment of Securities. The Company shall
promptly pay the principal of and interest on the Securities on the dates and in
the manner provided in the Securities and in this Indenture. Principal and
interest shall be considered paid on the date due if on such date the Trustee or
the Paying Agent holds in accordance with this Indenture money sufficient to pay
all principal and interest then due.
The Company shall pay interest on overdue principal at the
rate specified therefor in the Securities, and it shall pay interest on overdue
installments of interest at the same rate to the extent lawful.
SECTION 4.02. SEC Reports. The Company shall file with the
Trustee and provide Security holders, within 15 days after it files them with
the SEC, copies of its annual report and the information, documents and other
reports which the Company is required to file with the SEC pursuant to Section
13 or 15(d) of the Exchange Act. Notwithstanding that the Company may not be
required to remain subject to the reporting requirements of Section 13 or 15(d)
of the Exchange Act, the Company shall continue to file with the SEC and provide
the Trustee and Securityholders with such annual reports and such information,
documents and other reports as are specified in
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37
Sections 13 and 15(d) of the Exchange Act and applicable to a U.S. corporation
subject to such Sections , such information, documents and reports to be so
filed and provided at the times specified for the filing of such information,
documents and reports under such Sections . The Company also shall comply with
the other provisions of TIA Section 314(a). Notwithstanding anything to the
contrary herein, the Trustee shall have no duty to review such documents for
purposes of determining compliance with any provisions of this Indenture.
SECTION 4.03. Limitation on Indebtedness. (a) The Company
shall not Incur, and shall not permit any Restricted Subsidiary to Incur,
directly or indirectly, any Indebtedness unless, on the date of such Incurrence
and after giving effect thereto, the Consolidated Leverage Ratio is less than
7.0 to 1.0 if such Indebtedness is Incurred prior to February 1, 2000, or 5.0 to
1.0 if such Indebtedness is Incurred thereafter.
(b) Notwithstanding the foregoing paragraph (a), the Company
and any Restricted Subsidiary may Incur any or all of the following
Indebtedness:
(1) Indebtedness Incurred pursuant to any credit agreement or
Incurred by any Foreign Subsidiary; provided, however, that (i) after
giving effect to any such Incurrence the aggregate principal amount of
such Indebtedness then outstanding does not exceed the sum of (w) 65%
of the book value of the inventory of the Company and its Restricted
Subsidiaries and (x) 85% of the book value of the accounts receivables
of the Company and its Restricted Subsidiaries, (ii) in the case of any
Indebtedness Incurred by a Foreign Subsidiary, after giving effect to
such Incurrence the aggregate amount of all such Indebtedness then
outstanding does not exceed the sum of (y) 65% of the book value of the
inventory of such Foreign Subsidiary and (z) 85% of the book value of
the accounts receivables of such Foreign Subsidiary, and (iii)
notwithstanding the limitations in amount contained in (i) and (ii)
above, the Company and its Restricted Subsidiaries may Incur
Indebtedness pursuant to this clause (1) in an aggregate amount not to
exceed $10.0 million at any time outstanding;
(2) Indebtedness owed to and held by the Company or a Wholly
Owned Subsidiary; provided, however, that
<PAGE> 43
38
any subsequent issuance or transfer of any Capital Stock which results
in any such Wholly Owned Subsidiary ceasing to be a Wholly Owned
Subsidiary or any subsequent transfer of such Indebtedness (other than
to the Company or another Wholly Owned Subsidiary) shall be deemed, in
each case, to constitute the Incurrence of such Indebtedness by the
Company;
(3) the Securities and Guarantees thereof;
(4) Indebtedness outstanding on the Issue Date (other than
Indebtedness described in clause (1), (2) or (3) of this Section
4.03(b)), including the CDA Note;
(5) Refinancing Indebtedness in respect of Indebtedness
Incurred pursuant to Section 4.03(a) or pursuant to clause (3) or (4)
of this Section 4.03(b) or this clause (5);
(6) Indebtedness (including Capital Lease Obligations) of the
Company or any Restricted Subsidiary financing the purchase, lease or
improvement of property (real or personal) or equipment (whether
through the direct purchase of assets or the Capital Stock of any
Person owning such assets), in each case incurred no more than 180 days
after such purchase, lease or improvement of such property and any
Refinancing Indebtedness in respect of such Indebtedness; provided,
however, that (i) the amount of such Indebtedness (net of original
issue discount) does not exceed, at the time initially Incurred, 90% of
the fair market value of such acquired property or equipment and (ii)
at the time of the Incurrence of such Indebtedness and after giving
effect thereto, the aggregate amount of all Indebtedness Incurred
pursuant to this clause (6) and then outstanding shall not exceed $10.0
million;
(7) Hedging Obligations consisting of Interest Rate Agreements
directly related to Indebtedness permitted to be Incurred by the
Company and the Restricted Subsidiaries pursuant to this Indenture;
(8) Indebtedness consisting of performance, surety
or appeal bonds obtained by the Company or a Restricted
Subsidiary in the ordinary course of business;
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39
(9) Indebtedness consisting of self-insurance obligations; and
(10) Indebtedness in an aggregate principal amount which,
together with all other Indebtedness of the Company and the Restricted
Subsidiaries outstanding on the date of such Incurrence (other than
Indebtedness permitted by clauses (1) through (9) of this Section
4.03(b) or Section 4.03(a)) does not exceed $5.0 million.
(c) Notwithstanding the foregoing, the Company shall not Incur
any Indebtedness pursuant to Section 4.03(b) if the proceeds thereof are used,
directly or indirectly, to Refinance any Subordinated Obligations unless such
Indebtedness shall be subordinated to the Securities to at least the same extent
as such Subordinated Obligations.
(d) For purposes of determining compliance with this Section
4.03, (i) in the event that an item of Indebtedness meets the criteria of more
than one of the types of Indebtedness described herein, the Company, in its sole
discretion, will classify such item of Indebtedness and only be required to
include the amount and type of such Indebtedness in one of the above clauses and
(ii) an item of Indebtedness may be divided and classified in more than one of
the types of Indebtedness described herein.
SECTION 4.04. Limitation on Preferred Stock of Restricted
Subsidiaries. The Company shall not permit any Restricted Subsidiary to Incur,
directly or indirectly, any Preferred Stock except:
(a) Preferred Stock issued to and held by the Company or a
Wholly Owned Subsidiary; provided, however, that any subsequent
issuance or transfer of any Capital Stock which results in any such
Wholly Owned Subsidiary ceasing to be a Wholly Owned Subsidiary or any
subsequent transfer of such Preferred Stock (other than to the Company
or a Wholly Owned Subsidiary) shall be deemed, in each case, to
constitute the issuance of such Preferred Stock by the issuer thereof;
(b) Preferred Stock of a Subsidiary Incurred and outstanding
on or prior to the date on which such Subsidiary was acquired by the
Company (other than Preferred Stock Incurred in connection with, or to
<PAGE> 45
40
provide all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Subsidiary became a Subsidiary or was acquired by the
Company); provided, however, that on the date of such acquisition and
after giving effect thereto, the Company would have been able to Incur
at least $1.00 of Indebtedness pursuant to Section 4.03(a);
(c) Preferred Stock outstanding on the Issue Date (other
than Preferred Stock described in clause (a) or (b) of this Section
4.04); and
(d) Preferred Stock Incurred to Refinance Preferred Stock
referred to in clause (b) or (c) of this Section 4.04 or this clause
(d); provided, however, that to the extent such Preferred Stock
directly or indirectly Refinances Preferred Stock of a Subsidiary
described in clause (b) of this Section 4.04, such Preferred Stock
shall be Incurred only by such Subsidiary.
SECTION 4.05. Limitation on Restricted Payments. (a) The
Company shall not, and shall not permit any Restricted Subsidiary, directly or
indirectly, to, make a Restricted Payment if at the time the Company or such
Restricted Subsidiary makes such Restricted Payment:
(1) a Default shall have occurred and be continuing (or would
result therefrom);
(2) the Company is not able to Incur an additional $1.00 of
Indebtedness under Section 4.03(a); or
(3) the aggregate amount of such Restricted Payment and all
other Restricted Payments since the Issue Date would exceed the sum of:
(A) 50% of the Consolidated Net Income accrued during
the period (treated as one accounting period) from the
beginning of the fiscal quarter immediately following the
fiscal quarter during which the Securities are originally
issued to the end of the most recent fiscal quarter ending at
least 45 days prior to the date of such Restricted Payment
(or, in case such Consolidated Net Income shall be a deficit,
minus 100% of such deficit);
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(B) the aggregate Net Cash Proceeds received by the
Company from the issuance or sale of its Capital Stock (other
than Disqualified Stock) subsequent to the Issue Date (other
than an issuance or sale to a Subsidiary of the Company and
other than an issuance or sale to an employee stock ownership
plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees);
(C) the amount by which Indebtedness of the Company
is reduced on the Company's balance sheet upon the conversion
or exchange (other than by a Subsidiary of the Company)
subsequent to the Issue Date of any Indebtedness of the
Company convertible or exchangeable for Capital Stock (other
than Disqualified Stock) of the Company (less the amount of
any cash, or the fair value of any other property, distributed
by the Company upon such conversion or exchange);
(D) an amount equal to the sum of (i) the net
reduction in Investments in Unrestricted Subsidiaries
resulting from dividends, repayments of loans or advances or
other transfers of assets, in each case to the Company or any
Restricted Subsidiary from Unrestricted Subsidiaries, and (ii)
the portion (proportionate to the Company's equity interest in
such Subsidiary) of the fair market value of the net assets of
an Unrestricted Subsidiary at the time such Unrestricted
Subsidiary is designated a Restricted Subsidiary; provided,
however, that the foregoing sum shall not exceed, in the case
of any Unrestricted Subsidiary, the amount of Investments
previously made (and treated as a Restricted Payment) by the
Company or any Restricted Subsidiary in such Unrestricted
Subsidiary; and
(E) $2.0 million.
(b) The provisions of Section 4.05(a) shall not prohibit:
(i) any Restricted Payment made by exchange for, or out of the
proceeds of the substantially concurrent sale of, Capital Stock of the
Company (other than Disqualified Stock and other than Capital Stock
issued
<PAGE> 47
42
or sold to a Subsidiary of the Company or an employee stock ownership
plan or to a trust established by the Company or any of its
Subsidiaries for the benefit of their employees); provided, however,
that (A) such Restricted Payment shall be excluded in the calculation
of the amount of Restricted Payments and (B) the Net Cash Proceeds from
such sale shall be excluded from the calculation of amounts under
clause (3)(B) of Section 4.05(a);
(ii) any purchase, repurchase, redemption, defeasance or other
acquisition or retirement for value of Subordinated Obligations made by
exchange for, or out of the proceeds of the substantially concurrent
sale of, Indebtedness of the Company which is permitted to be Incurred
pursuant to Section 4.03; provided, however, that such purchase,
repurchase, redemption, defeasance or other acquisition or retirement
for value shall be excluded in the calculation of the amount of
Restricted Payments;
(iii) dividends paid within 60 days after the date of declaration
thereof if at such date of declaration such dividend would have
complied with Section 4.05(a); provided, however, that at the time of
payment of such dividend, no other Default shall have occurred and be
continuing (or result therefrom); provided further, however, that such
dividend shall be included in the calculation of the amount of
Restricted Payments;
(iv) the repurchase or other acquisition of shares of, or
options to purchase shares of, common stock of the Company or any of
its Subsidiaries from employees, former employees, consultants,
directors or former directors of the Company or any of its Subsidiaries
(or permitted transferees of such employees, former employees,
consultants, directors or former directors), pursuant to the terms of
the agreements (including employment or consulting agreements) or plans
(or amendments thereto) approved by the Board of Directors under which
such individuals purchase or sell or are granted the option to purchase
or sell, shares of such common stock or as otherwise approved by the
Board of Directors; provided, however, that the aggregate amount of
such repurchases and other acquisitions shall not exceed $1.0 million
in any calendar year; provided further, however, that such repurchases
and other
<PAGE> 48
43
acquisitions shall be excluded in the calculation of the amount of
Restricted Payments;
(v) payments or distributions to dissenting stockholders
pursuant to applicable law in connection with a consolidation, merger
or transfer of assets that complies with the provisions of this
Indenture applicable to mergers, consolidations and transfers of all or
substantially all of the property and assets of the Company; provided,
however, that such payments or distributions from and after the Issue
Date shall not in the aggregate exceed $2.0 million; provided further,
however, that such payments and distributions shall be included in the
calculation of the amount of Restricted Payments; or
(vi) Investments in Joint Ventures; provided, however, that the
aggregate amount of all such Investments pursuant to this clause (vi)
shall not exceed $10.0 million; provided further, however, that such
Investments pursuant to this clause (vi) shall be excluded in the
calculation of the amount of Restricted Payments.
SECTION 4.06. Limitation on Restrictions on Distributions from
Restricted Subsidiaries. The Company shall not, and shall not permit any
Restricted Subsidiary to, create or otherwise cause or permit to exist or become
effective any consensual encumbrance or restriction on the ability of any
Restricted Subsidiary to (a) pay dividends or make any other distributions on
its Capital Stock to the Company or a Restricted Subsidiary or pay any
Indebtedness owed to the Company, (b) make any loans or advances to the Company
or (c) transfer any of its property or assets to the Company, except:
(i) any encumbrance or restriction pursuant to an agreement
in effect at or entered into on the Issue Date;
(ii) any encumbrance or restriction arising under or by
reason of applicable law;
(iii) any encumbrance or restriction with respect to a
Restricted Subsidiary pursuant to an agreement relating to any
Indebtedness Incurred by such Restricted Subsidiary on or prior to the
date on which such Restricted Subsidiary was acquired by the Company
<PAGE> 49
44
(other than Indebtedness Incurred as consideration in, or to provide
all or any portion of the funds or credit support utilized to
consummate, the transaction or series of related transactions pursuant
to which such Restricted Subsidiary became a Restricted Subsidiary or
was acquired by the Company) and outstanding on such date;
(iv) any encumbrance or restriction pursuant to an agreement
effecting a Refinancing of Indebtedness Incurred pursuant to an
agreement referred to in clause (i) or (iii) of this Section 4.06 or
this clause (iv) or contained in any amendment to an agreement referred
to in clause (i) or (iii) of this Section 4.06 or this clause (iv);
provided, however, that the encumbrances and restrictions with respect
to such Restricted Subsidiary contained in any such refinancing
agreement or amendment are no less favorable in any material respect to
the Securityholders than encumbrances and restrictions with respect to
such Restricted Subsidiary contained in such predecessor agreements;
(v) any such encumbrance or restriction consisting of
customary non-assignment provisions in leases governing leasehold
interests to the extent such provisions restrict the transfer of the
lease or the property leased thereunder;
(vi) in the case of clause (c) above, (A) any restriction
arising in connection with any Permitted Lien to the extent such
restriction restricts the transfer of the Property or the assets
subject to such Permitted Lien, including the transfer of such Property
or assets upon the foreclosure thereof, (B) restrictions existing by
virtue of any transfer of, agreement to transfer or option or right
with respect to any Property or assets of the Company or any Restricted
Subsidiary or (C) restrictions arising or agreed to in the ordinary
course of business, not relating to any Indebtedness, and that do not,
individually or in the aggregate, detract from the value of the
Property or assets subject thereto in any manner material to the
Company or any Restricted Subsidiary taken as a whole; and
(vii) any restriction with respect to a Restricted
Subsidiary imposed pursuant to an agreement entered
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45
into for the sale or disposition of all or substantially all the
Capital Stock or assets of such Restricted Subsidiary pending the
closing of such sale or disposition.
SECTION 4.07. Limitation on Sales of Assets and Subsidiary
Stock. (a) The Company shall not, and shall not permit any Restricted Subsidiary
to, directly or indirectly, consummate any Asset Disposition unless (i) the
Company or such Restricted Subsidiary receives consideration at the time of such
Asset Disposition at least equal to the fair market value (including as to the
value of all non-cash consideration), as determined in good faith by the Board
of Directors, of the shares and assets subject to such Asset Disposition and at
least 80% of the consideration thereof received by the Company or such
Restricted Subsidiary is in the form of cash or cash equivalents and (ii) an
amount equal to 100% of the Net Available Cash from such Asset Disposition is
applied by the Company (or such Restricted Subsidiary, as the case may be) (A)
first, to the extent the Company elects (or is required by the terms of any
Indebtedness), to prepay, repay, redeem or purchase Senior Indebtedness or
Indebtedness (other than any Disqualified Stock) of a Wholly Owned Subsidiary
(in each case other than Indebtedness owed to the Company or an Affiliate of the
Company) within one year from the later of the date of such Asset Disposition or
the receipt of such Net Available Cash; (B) second, to the extent of the balance
of such Net Available Cash after application in accordance with clause (A), to
the extent the Company elects, to acquire Additional Assets within one year from
the later of the date of such Asset Disposition or the receipt of such Net
Available Cash; (C) third, to the extent of the balance of such Net Available
Cash after application in accordance with clauses (A) and (B), to make an Offer
to the holders of the Securities (and to holders of other Senior Indebtedness
designated by the Company) to purchase Securities (and such other Senior
Indebtedness) pursuant to and subject to the conditions of Section 4.07(b); and
(D) fourth, to the extent of the balance of such Net Available Cash in excess of
$200,000 in any fiscal year after application in accordance with clauses (A),
(B) and (C), to (x) the acquisition by the Company or any Wholly Owned
Subsidiary of Additional Assets or (y) the prepayment, repayment or purchase of
Indebtedness (other than any Disqualified Stock) of the Company (other than
Indebtedness owed to an Affiliate of the Company) or Indebtedness of any
Subsidiary (other than Indebtedness owed to the Company or an Affiliate of the
Company), in each case
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46
within one year from the later of the receipt of such Net Available Cash and the
date the offer described in Section 4.07(b) is consummated; provided, however,
that in connection with any prepayment, repayment or purchase of Indebtedness
pursuant to clause (A), (C) or (D) above, the Company or such Restricted
Subsidiary shall permanently retire such Indebtedness and shall cause the
related loan commitment (if any) to be permanently reduced in an amount equal to
the principal amount so prepaid, repaid or purchased. Notwithstanding the
foregoing provisions of this Section 4.07, the Company and the Restricted
Subsidiaries shall not be required to apply any Net Available Cash in accordance
with this Section 4.07(a) except to the extent that the aggregate Net Available
Cash from all Asset Dispositions which are not applied in accordance with this
Section 4.07(a) exceeds $5.0 million. Pending application of Net Available Cash
pursuant to this Section 4.07(a), such Net Available Cash shall be invested in
Permitted Investments.
For the purposes of this Section 4.07, the following are
deemed to be cash or cash equivalents: (x) the assumption of Indebtedness of the
Company or any Restricted Subsidiary and the release of the Company or such
Restricted Subsidiary from all liability on such Indebtedness in connection with
such Asset Disposition and (y) securities received by the Company or any
Restricted Subsidiary from the transferee that are promptly converted by the
Company or such Restricted Subsidiary into cash.
(b) In the event of an Asset Disposition that requires the
purchase of Securities (and other Senior Indebtedness) pursuant to Section
4.07(a)(ii)(C), the Company shall be required to purchase Securities tendered
pursuant to an offer by the Company for the Securities (and other Senior
Indebtedness) (the "Offer") at a purchase price of 100% of their Accreted Value
plus accrued but unpaid interest, if any (or, in respect of such other Senior
Indebtedness, 100% of their accreted value or principal amount (without
premium), as the case may be, plus accrued but unpaid interest, if any, or such
lesser price, if any, as may be provided for by the terms of such Senior
Indebtedness) in accordance with the procedures (including prorating in the
event of oversubscription) set forth in Section 4.07(c). If the aggregate
purchase price of Securities (and any other Senior Indebtedness) tendered
pursuant to the Offer is less than the Net Available Cash allotted to the
purchase thereof, the Company shall be
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47
required to apply the remaining Net Available Cash in accordance with Section
4.07(a)(ii)(D). The Company shall not be required to make an Offer to purchase
Securities (and other Senior Indebtedness) pursuant to this Section 4.07 if the
Net Available Cash available therefor is less than $5.0 million (which lesser
amount shall be carried forward for purposes of determining whether such an
Offer is required with respect to the Net Available Cash from any subsequent
Asset Disposition).
(c) (1) Promptly, and in any event within 20 Business Days,
after the Company becomes obligated to make an Offer, the Company shall be
obligated to deliver to the Trustee and send, by first-class mail to each
Holder, a written notice stating that the Holder may elect to have his
Securities purchased by the Company either in whole or in part (subject to
prorating as hereinafter described in the event the Offer is oversubscribed) in
integral multiples of $1,000 of principal amount at maturity, at the applicable
purchase price. The notice shall specify a purchase date not less than 30 days
nor more than 60 days after the date of such notice (the "Purchase Date") and
shall contain such information concerning the business of the Company which the
Company in good faith believes will enable such Holders to make an informed
decision (which at a minimum will include (i) the most recently filed Annual
Report on Form 10-K (including audited consolidated financial statements but
excluding other exhibits) of the Company, the most recent subsequently filed
Quarterly Report on Form 10-Q (excluding Exhibits) and any Current Report on
Form 8-K of the Company filed subsequent to such Quarterly Report, other than
Current Reports describing Asset Dispositions otherwise described in the
offering materials (or corresponding successor reports), (ii) a description of
material developments in the Company's business subsequent to the date of the
latest of such Reports and (iii) if material, appropriate pro forma financial
information) and all instructions and materials necessary to tender Securities
pursuant to the Offer, together with the information contained in clause (3).
(2) Not later than the date upon which written notice of an
Offer is delivered to the Trustee as provided above, the Company shall deliver
to the Trustee an Officers' Certificate as to (i) the amount of the Offer (the
"Offer Amount"), (ii) the allocation of the Net Available Cash from the Asset
Dispositions pursuant to which such Offer is being made and (iii) the compliance
of such allocation with the
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provisions of Section 4.07(a). On or prior to the Purchase Date, the Company
shall also irrevocably deposit with the Trustee or with a paying agent (or, if
the Company is acting as its own paying agent, segregate and hold in trust) in
Temporary Cash Investments, maturing on the last day prior to the Purchase Date
or on the Purchase Date if funds are immediately available by open of business,
an amount equal to the Offer Amount to be held for payment in accordance with
the provisions of this Section . Upon the expiration of the period for which the
Offer remains open (the "Offer Period"), the Company shall deliver to the
Trustee for cancellation the Securities or portions thereof which have been
properly tendered to and are to be accepted by the Company. The Trustee shall,
on the Purchase Date and provided it has received an amount of funds equal to
the Offer Amount, mail or deliver payment to each tendering Holder in the amount
of the purchase price. In the event that the aggregate purchase price of the
Securities delivered by the Company to the Trustee is less than the Offer
Amount, the Trustee shall deliver the excess to the Company immediately after
the expiration of the Offer Period for application in accordance with this
Section .
(3) Holders electing to have a Security purchased shall be
required to surrender the Security, with an appropriate form duly completed, to
the Company at the address specified in the notice at least three Business Days
prior to the Purchase Date. Holders shall be entitled to withdraw their election
if the Trustee or the Company receives, not later than one Business Day prior to
the Purchase Date, a telex, facsimile transmission or letter setting forth the
name of the Holder, the principal amount at maturity of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased. If at the expiration
of the Offer Period the aggregate purchase price of Securities (and any other
Senior Indebtedness included in the Offer) surrendered pursuant to the Offer
exceeds the Offer Amount, the Company shall select the Securities and the other
Senior Indebtedness to be purchased on a pro rata basis (with such adjustments
as may be deemed appropriate by the Company so that only Securities and other
Senior Indebtedness in denominations of $1,000 principal amount at maturity, or
integral multiples thereof, shall be purchased). Holders whose Securities are
purchased only in part shall be issued new Securities equal in principal amount
to the unpurchased principal amount of the Securities surrendered.
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(4) At the time the Company delivers Securities to the Trustee
which are to be accepted for purchase, the Company shall also deliver an
Officers' Certificate stating that such Securities are to be accepted by the
Company pursuant to and in accordance with the terms of this Section . A
Security shall be deemed to have been accepted for purchase at the time the
Trustee, directly or through an agent, mails or delivers payment therefor to the
surrendering Holder.
(d) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant to
this Section . To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section , the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.08. Limitation on Affiliate Transactions. (a) The
Company shall not, and shall not permit any Restricted Subsidiary to, enter into
or permit to exist any transaction (including the purchase, sale, lease or
exchange of any property, employee compensation arrangements or the rendering of
any service) with any Affiliate of the Company (an "Affiliate Transaction")
unless the terms thereof (i) are no less favorable to the Company or such
Restricted Subsidiary than those that could be obtained at the time of such
transaction in arm's-length dealings with a Person who is not such an Affiliate,
(ii) with respect to any Affiliate Transaction that involves an amount in excess
of $1.0 million, are set forth in writing and have been approved by a majority
of the members of the Board of Directors having no personal stake in such
Affiliate Transaction and (iii) with respect to any Affiliate Transaction that
involves an amount in excess of $10.0 million, have been determined by (A) a
nationally recognized investment banking firm to be fair from a financial
standpoint to the Company or such Restricted Subsidiary or (B) an appraisal firm
nationally recognized in making such determinations to be on terms that are not
less favorable to the Company or such Restricted Subsidiary than the terms that
could be obtained in an arm's-length transaction from a Person that is not an
Affiliate of the Company.
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(b) The provisions of Section 4.08(a) shall not prohibit (i)
any Restricted Payment permitted to be paid pursuant to Section 4.05, (ii) any
issuance of securities, or other payments, awards or grants in cash, securities
or otherwise pursuant to, or the funding of, employment arrangements, stock
options and stock ownership plans approved by the Board of Directors, (iii) the
grant of stock options or similar rights to employees and directors of the
Company pursuant to plans approved by the Board of Directors, (iv) loans or
advances to employees in the ordinary course of business in accordance with the
past practices of the Company or its Restricted Subsidiaries, but in any event
not to exceed $1.0 million in the aggregate outstanding at any one time, (v) the
payment of reasonable fees to directors of the Company and its Restricted
Subsidiaries who are not employees of the Company or its Restricted
Subsidiaries, (vi) any Affiliate Transaction between the Company and a Wholly
Owned Subsidiary or between Wholly Owned Subsidiaries, (vii) any Affiliate
Transaction entered into prior to the Issue Date or the renewal thereof upon
substantially similar terms or (viii) indemnification payments to directors and
officers of the Company and its Restricted Subsidiaries in accordance with
applicable state laws.
SECTION 4.09. Limitation on the Sale or Issuance of Capital
Stock of Restricted Subsidiaries. The Company shall not sell or otherwise
dispose of any Capital Stock of a Restricted Subsidiary (other than a Joint
Venture), and shall not permit any Restricted Subsidiary (other than a Joint
Venture), directly or indirectly, to issue or sell or otherwise dispose of any
of its Capital Stock, except (i) to the Company or a Wholly Owned Subsidiary,
(ii) if, immediately after giving effect to such issuance, sale or other
disposition, neither the Company nor any of its Subsidiaries own any Capital
Stock of such Restricted Subsidiary or (iii) if, immediately after giving effect
to such issuance, sale or other disposition, such Restricted Subsidiary would no
longer constitute a Restricted Subsidiary and any Investment in such Person
remaining after giving effect thereto would have been permitted to be made under
the covenant described in Section 4.05 if made on the date of such issuance,
sale or other disposition.
SECTION 4.10. Change of Control. (a) Upon the occurrence of a
Change of Control, each Holder shall have the right to require that the Company
repurchase such Holder's Securities at a purchase price in cash equal to
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101% of the Accreted Value thereof plus accrued and unpaid interest, if any, to
the date of purchase (subject to the right of holders of record on the relevant
record date to receive interest on the relevant interest payment date), in
accordance with the terms contemplated in Section 4.10(b).
(b) Within 30 days following any Change of Control, the
Company shall mail a notice to each Holder with a copy to the Trustee stating:
(1) that a Change of Control has occurred and that such Holder
has the right to require the Company to purchase such Holder's
Securities at a purchase price in cash equal to 101% of the Accreted
Value thereof plus accrued and unpaid interest, if any, to the date of
purchase (subject to the right of Holders of record on the relevant
record date to receive interest on the relevant interest payment date);
(2) the circumstances and relevant facts regarding such Change
of Control (including information with respect to pro forma historical
income, cash flow and capitalization, each after giving effect to such
Change of Control);
(3) the repurchase date (which shall be no earlier than 30
days nor later than 60 days from the date such notice is mailed); and
(4) the instructions determined by the Company, consistent
with this Section , that a Holder must follow in order to have its
Securities purchased.
(c) Holders electing to have a Security purchased will be
required to surrender the Security, with an appropriate form duly completed, to
the Company at the address specified in the notice at least three Business Days
prior to the purchase date. Holders will be entitled to withdraw their election
if the Trustee or the Company receives, not later than one Business Day prior to
the purchase date, a telegram, telex, facsimile transmission or letter setting
forth the name of the Holder, the principal amount of the Security which was
delivered for purchase by the Holder and a statement that such Holder is
withdrawing his election to have such Security purchased.
(d) On the purchase date, all Securities purchased by the
Company under this Section shall be delivered
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by the Trustee for cancellation, and the Company shall pay the purchase price
plus accrued and unpaid interest, if any, to the Holders entitled thereto.
(e) The Company shall comply, to the extent applicable, with
the requirements of Section 14(e) of the Exchange Act and any other securities
laws or regulations in connection with the repurchase of Securities pursuant to
this Section . To the extent that the provisions of any securities laws or
regulations conflict with provisions of this Section , the Company shall comply
with the applicable securities laws and regulations and shall not be deemed to
have breached its obligations under this Section by virtue thereof.
SECTION 4.11. Limitation on Liens. The Company shall not, and
shall not permit any Restricted Subsidiary to, directly or indirectly, Incur or
permit to exist any Lien of any nature whatsoever on any of its properties
(including Capital Stock of a Restricted Subsidiary), whether owned at the Issue
Date or thereafter acquired, other than Permitted Liens, without effectively
providing that the Securities shall be secured equally and ratably with (or
prior to) the obligations so secured for so long as such obligations are so
secured.
SECTION 4.12. Limitation on Sale/Leaseback Transactions. The
Company shall not, and shall not permit any Restricted Subsidiary to, enter into
any Sale/Leaseback Transaction with respect to any property unless (i) the
Company or such Subsidiary would be entitled to (A) Incur Indebtedness in an
amount equal to the Attributable Debt with respect to such Sale/Leaseback
Transaction pursuant to Section 4.03 and (B) create a Lien on such property
securing such Attributable Debt without equally and ratably securing the
Securities pursuant to Section 4.11, (ii) the net proceeds received by the
Company or any Restricted Subsidiary in connection with such Sale/Leaseback
Transaction are at least equal to the fair value (as determined by the Board of
Directors) of such property and (iii) the Company applies the proceeds of such
transaction in compliance with Section 4.07. The foregoing restriction shall not
apply to any Sale/Leaseback Transaction if (i) the lease is for a period,
including renewal rights, of not in excess of three years or (ii) the
transaction is between the Company and any Wholly Owned Subsidiary or between
Wholly Owned Subsidiaries.
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SECTION 4.13. Limitation on Lines of Business. The Company
shall not, and shall not permit any Restricted Subsidiary to, directly or
indirectly, engage in any business other than a Related Business.
SECTION 4.14. Future Guarantors. In the event that, after the
Issue Date, a Restricted Subsidiary Incurs any Indebtedness pursuant to Section
4.03(a), Section 4.03(b)(1) (but, in the case of a Foreign Subsidiary, only in
the case of Indebtedness Incurred pursuant to clause (i) thereof), Section
4.03(b)(5) (but only in the case of Refinancing Indebtedness with respect to
Indebtedness Incurred pursuant to Section 4.03(a)) or Section 4.03(b)(10), the
Company shall cause such Restricted Subsidiary to execute a supplemental
indenture to this Indenture in a form reasonably satisfactory to the Trustee in
order to Guarantee the Securities pursuant to the terms and conditions set forth
in Article 10 hereof and shall cause all Indebtedness of such Restricted
Subsidiary owing to the Company or any other Subsidiary of the Company and not
previously discharged to be converted into Capital Stock of such Restricted
Subsidiary (other than Disqualified Stock).
SECTION 4.15. Compliance Certificate. The Company shall
deliver to the Trustee within 120 days after the end of each fiscal year of the
Company an Officers' Certificate stating that in the course of the performance
by the signers of their duties as Officers of the Company they would normally
have knowledge of any Default and whether or not the signers know of any Default
that occurred during such period. If they do, the certificate shall describe the
Default, its status and what action the Company is taking or proposes to take
with respect thereto. The Company also shall comply with TIA Section 314(a)(4).
SECTION 4.16. Further Instruments and Acts. Upon request of
the Trustee, the Company will execute and deliver such further instruments and
do such further acts as may be reasonably necessary or proper to carry out more
effectively the purpose of this Indenture.
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ARTICLE 5
Successor Company
SECTION 5.01. When Company May Merge or Transfer Assets.
(a) The Company shall not consolidate with or merge with or into, or convey,
transfer or lease, in one transaction or a series of transactions, all or
substantially all its assets to, any Person, unless:
(i) the resulting, surviving or transferee Person (the
"Successor Company") shall be a Person organized and existing under the
laws of the United States of America, any State thereof or the District
of Columbia and the Successor Company (if not the Company) shall
expressly assume, by an indenture supplemental hereto, executed and
delivered to the Trustee, in form reasonably satisfactory to the
Trustee, all the obligations of the Company under the Securities and
this Indenture;
(ii) immediately after giving effect to such transaction (and
treating any Indebtedness which becomes an obligation of the Successor
Company or any Subsidiary as a result of such transaction as having
been Incurred by the Successor Company or such Subsidiary at the time
of such transaction), no Default shall have occurred and be continuing;
(iii) immediately after giving effect to such transaction, the
Successor Company would be able to Incur an additional $1.00 of
Indebtedness pursuant to Section 4.03(a);
(iv) immediately after giving effect to such transaction, the
Successor Company shall have Consolidated Net Worth in an amount that
is not less than the Consolidated Net Worth of the Company immediately
prior to such transaction; provided, however, that this clause (iv)
shall not apply to a consolidation or merger with or into a Wholly
Owned Subsidiary if, in connection with any such merger or
consolidation, no consideration (other than Common Stock in the
Successor Company (or a Person that owns directly or indirectly all of
the Capital Stock of the Successor Company immediately following such
transaction)) shall be issued or distributed to the stockholders of the
Company; and
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(v) the Company shall have delivered to the Trustee an
Officers' Certificate and an Opinion of Counsel, each stating that such
consolidation, merger or transfer and such supplemental indenture (if
any) comply with this Indenture;
provided, however, that clauses (iii) and (iv) shall not apply if, in
the good faith determination of the Board of Directors, whose
determination shall be evidenced by a resolution of the Board of
Directors, the principal purpose and effect of such transaction is to
change the state of incorporation of the Company.
The Successor Company shall be the successor to the Company
and shall succeed to, and be substituted for, and may exercise every right and
power of, the Company under this Indenture, but the predecessor Company in the
case of a conveyance, transfer or lease shall not be released from the
obligation to pay the principal of and interest on the Securities.
(b) The Company shall not permit any Subsidiary Guarantor to
consolidate with or merge with or into, or convey, transfer or lease, in one
transaction or series of transactions, all or substantially all of its assets to
any Person unless: (i) the resulting, surviving or transferee Person (if not
such Subsidiary) shall be a Person organized and existing under the laws of the
jurisdiction under which such Subsidiary was organized or under the laws of the
United States of America, or any State hereof or the District of Columbia, and
such Person shall expressly assume, by an amendment to this Indenture, in a form
reasonably acceptable to the Trustee, all the obligations of such Subsidiary, if
any, under its Subsidiary Guaranty; (ii) immediately after giving effect to such
transaction or transactions on a pro forma basis (and treating any Indebtedness
which becomes an obligation of the resulting, surviving or transferee Person as
a result of such transaction as having been issued by such Person at the time of
such transaction), no Default shall have occurred and be continuing; and (iii)
the Company delivers to the Trustee an Officers' Certificate and an Opinion of
Counsel, each stating that such consolidation, merger or transfer and such
amendment to this Indenture, if any, complies with this Indenture.
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ARTICLE 6
Defaults and Remedies
SECTION 6.01. Events of Default. An "Event of Default"
occurs if:
(1) the Company defaults in any payment of interest on any
Security when the same becomes due and payable, and such default
continues for a period of 30 days;
(2) the Company (i) defaults in the payment of the principal
of any Security when the same becomes due and payable at its Stated
Maturity, upon redemption, upon declaration or otherwise, or (ii) fails
to redeem or purchase Securities when required pursuant to this
Indenture or the Securities;
(3) the Company fails to comply with Section 5.01;
(4) the Company fails to comply with Section 4.02, 4.03, 4.04,
4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13 or 4.14 (other
than a failure to purchase Securities when required under Section 4.07
or 4.10) and such failure continues for 30 days after the notice
specified below;
(5) the Company fails to comply with any of its agreements in
the Securities or this Indenture (other than those referred to in
clause (1), (2), (3) or (4) above) and such failure continues for 60
days after the notice specified below;
(6) Indebtedness of the Company or any Significant Subsidiary
is not paid within any applicable grace period after final maturity or
is accelerated by the holders thereof because of a default and the
total amount of such Indebtedness unpaid or accelerated exceeds $10.0
million, or its foreign currency equivalent at the time;
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(7) the Company or any Significant Subsidiary pursuant to or
within the meaning of any Bankruptcy Law:
(A) commences a voluntary case;
(B) consents to the entry of an order for relief
against it in an involuntary case;
(C) consents to the appointment of a Custodian of
it or for any substantial part of its property; or
(D) makes a general assignment for the benefit of
its creditors;
or takes any comparable action under any foreign laws
relating to insolvency;
(8) a court of competent jurisdiction enters an order or
decree under any Bankruptcy Law that:
(A) is for relief against the Company or any
Significant Subsidiary in an involuntary case;
(B) appoints a Custodian of the Company or
any Significant Subsidiary or for any substantial
part of its property; or
(C) orders the winding up or liquidation of
the Company or any Significant Subsidiary;
or any similar relief is granted under any foreign laws
and the order or decree remains unstayed and in effect
for 60 days;
(9) any judgment or decree for the payment of money in excess
of $10.0 million or its foreign currency equivalent at the time is
entered against the Company or any Significant Subsidiary, remains
outstanding for a period of 60 days following the entry of such
judgment or decree and is not discharged, waived or the execution
thereof stayed within 10 days after the notice specified below; or
(10) a Subsidiary Guaranty ceases to be in full force and
effect (other than in accordance with the terms of such Subsidiary
Guaranty) or a Subsidiary
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Guarantor denies or disaffirms its obligations under its Subsidiary
Guaranty.
The foregoing will constitute Events of Default whatever the
reason for any such Event of Default and whether it is voluntary or involuntary
or is effected by operation of law or pursuant to any judgment, decree or order
of any court or any order, rule or regulation of any administrative or
governmental body.
The term "Bankruptcy Law" means Title 11, United States Code,
or any similar Federal or state law for the relief of debtors. The term
"Custodian" means any receiver, trustee, assignee, liquidator, custodian or
similar official under any Bankruptcy Law.
A Default under clauses (4), (5) or (9) is not an Event of
Default until the Trustee or the holders of at least 25% in principal amount at
maturity of the outstanding Securities notify the Company of the Default and the
Company does not cure such Default within the time specified after receipt of
such notice. Such notice must specify the Default, demand that it be remedied
and state that such notice is a "Notice of Default".
The Company shall deliver to the Trustee, within 30 days after
the occurrence thereof, written notice in the form of an Officers' Certificate
of any Event of Default under clause (6) or (10) and any event which with the
giving of notice or the lapse of time would become an Event of Default under
clause (4), (5) or (9), its status and what action the Company is taking or
proposes to take with respect thereto. The Trustee shall not be deemed to have
knowledge of any Default or Event of Default unless one of its Trust Officers
receives written notice thereof from the Company or any of the Holders.
SECTION 6.02. Acceleration. If an Event of Default (other than
an Event of Default specified in Section 6.01(7) or (8) with respect to the
Company) occurs and is continuing, the Trustee by notice to the Company, or the
Holders of at least 25% in principal amount at maturity of the Securities by
notice to the Company and the Trustee, may declare the Accreted Value of and
accrued but unpaid interest on all the Securities (the "Default Amount") to be
due and payable. Upon such a declaration, the Default Amount shall be due and
payable immediately. If an Event of Default specified in Section 6.01(7) or (8)
with respect to
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the Company occurs, the Default Amount shall ipso facto become and be
immediately due and payable without any declaration or other act on the part of
the Trustee or any Securityholders. The Holders of a majority in principal
amount at maturity of the Securities by notice to the Trustee may rescind an
acceleration and its consequences if the rescission would not conflict with any
judgment or decree and if all existing Events of Default have been cured or
waived except nonpayment of principal or interest that has become due solely
because of acceleration. No such rescission shall affect any subsequent Default
or impair any right consequent thereto.
SECTION 6.03. Other Remedies. If an Event of Default occurs
and is continuing, the Trustee may pursue any available remedy to collect the
payment of principal of or interest on the Securities or to enforce the
performance of any provision of the Securities or this Indenture.
The Trustee may maintain a proceeding even if it does not
possess any of the Securities or does not produce any of them in the proceeding.
A delay or omission by the Trustee or any Securityholder in exercising any right
or remedy accruing upon an Event of Default shall not impair the right or remedy
or constitute a waiver of or acquiescence in the Event of Default. No remedy is
exclusive of any other remedy. All available remedies are cumulative.
SECTION 6.04. Waiver of Past Defaults. The Holders of a
majority in principal amount at maturity of the Securities by notice to the
Trustee may waive an existing Default and its consequences except (i) a Default
in the payment of the principal of or interest on a Security or (ii) a Default
in respect of a provision that under Section 9.02 cannot be amended without the
consent of each Securityholder affected. When a Default is waived, it is deemed
cured, but no such waiver shall extend to any subsequent or other Default or
impair any consequent right.
SECTION 6.05. Control by Majority. The Holders of a majority
in principal amount at maturity of the Securities may direct the time, method
and place of conducting any proceeding for any remedy available to the Trustee
or of exercising any trust or power conferred on the Trustee. However, the
Trustee may refuse to follow any direction that conflicts with law or this
Indenture or, subject to Section 7.01, that the Trustee determines is unduly
prejudicial to the rights of other Securityholders or
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would involve the Trustee in personal liability; provided, however, that the
Trustee may take any other action deemed proper by the Trustee that is not
inconsistent with such direction. Prior to taking any action hereunder, the
Trustee shall be entitled to indemnification from the Holders reasonably
satisfactory to it in its sole discretion against all losses and expenses caused
by taking or not taking such action.
SECTION 6.06. Limitation on Suits. Except to enforce the right
to receive payment of principal, premium (if any) or interest when due, no
Securityholder may pursue any remedy with respect to this Indenture or the
Securities unless:
(1) the Holder gives to the Trustee written notice stating
that an Event of Default is continuing;
(2) the Holders of at least 25% in principal amount at
maturity of the Securities make a written request to the Trustee to
pursue the remedy;
(3) such Holder or Holders offer to the Trustee reasonable
security or indemnity against any loss, liability or expense;
(4) the Trustee does not comply with the request within 60
days after receipt of the request and the offer of security or
indemnity; and
(5) the Holders of a majority in principal amount at maturity
of the Securities do not give the Trustee a direction inconsistent with
the request during such 60-day period.
A Securityholder may not use this Indenture to prejudice the
rights of another Securityholder or to obtain a preference or priority over
another Securityholder.
SECTION 6.07. Rights of Holders to Receive Payment.
Notwithstanding any other provision of this Indenture, the right of any Holder
to receive payment of principal of and interest on the Securities held by such
Holder, on or after the respective due dates expressed in the Securities, or to
bring suit for the enforcement of any such payment on or after such respective
dates, shall not be impaired or affected without the consent of such Holder.
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SECTION 6.08. Collection Suit by Trustee. If an Event of
Default specified in Section 6.01(1) or (2) occurs and is continuing, the
Trustee may recover judgment in its own name and as trustee of an express trust
against the Company for the whole amount then due and owing (together with
interest on any unpaid interest to the extent lawful) and the amounts provided
for in Section 7.07.
SECTION 6.09. Trustee May File Proofs of Claim. The Trustee
may file such proofs of claim and other papers or documents as may be necessary
or advisable in order to have the claims of the Trustee and the Securityholders
allowed in any judicial proceedings relative to the Company, its creditors or
its property and, unless prohibited by law or applicable regulations, may vote
on behalf of the Holders in any election of a trustee in bankruptcy or other
Person performing similar functions, and any Custodian in any such judicial
proceeding is hereby authorized by each Holder to make payments to the Trustee
and, in the event that the Trustee shall consent to the making of such payments
directly to the Holders, to pay to the Trustee any amount due it for the
reasonable compensation, expenses, disbursements and advances of the Trustee,
its agents and its counsel, and any other amounts due the Trustee under Section
7.07.
SECTION 6.10. Priorities. If the Trustee collects any money
or property pursuant to this Article 6, it shall pay out the money or property
in the following order:
FIRST: to the Trustee for amounts due under Section 7.07;
SECOND: to Securityholders for amounts due and unpaid on the
Securities for principal and interest, ratably, without preference or
priority of any kind, according to the amounts due and payable on the
Securities for principal and interest, respectively; and
THIRD: to the Company.
The Trustee may fix a record date and payment date for any
payment to Securityholders pursuant to this Section. At least 15 days before
such record date, the Company shall mail to each Securityholder a notice that
states the record date, the payment date and amount to be paid.
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SECTION 6.11. Undertaking for Costs. In any suit for the
enforcement of any right or remedy under this Indenture or in any suit against
the Trustee for any action taken or omitted by it as Trustee, a court in its
discretion may require the filing by any party litigant in the suit of an
undertaking to pay the costs of the suit, and the court in its discretion may
assess reasonable costs, including reasonable attorneys' fees, against any party
litigant in the suit, having due regard to the merits and good faith of the
claims or defenses made by the party litigant. This Section does not apply to a
suit by the Trustee, a suit by a Holder pursuant to Section 6.07 or a suit by
Holders of more than 10% in principal amount at maturity of the Securities.
SECTION 6.12. Waiver of Stay or Extension Laws. The Company
(to the extent it may lawfully do so) shall not at any time insist upon, or
plead, or in any manner whatsoever claim or take the benefit or advantage of,
any stay or extension law wherever enacted, now or at any time hereafter in
force, which may affect the covenants or the performance of this Indenture; and
the Company (to the extent that it may lawfully do so) hereby expressly waives
all benefit or advantage of any such law, and shall not hinder, delay or impede
the execution of any power herein granted to the Trustee, but shall suffer and
permit the execution of every such power as though no such law had been enacted.
ARTICLE 7
Trustee
SECTION 7.01. Duties of Trustee. (a) If an Event of Default
has occurred and is continuing, the Trustee shall exercise the rights and powers
vested in it by this Indenture and use the same degree of care and skill in
their exercise as a prudent Person would exercise or use under the circumstances
in the conduct of such Person's own affairs.
(b) Except during the continuance of an Event of Default:
(1) the Trustee undertakes to perform such duties and only
such duties as are specifically set forth in this Indenture and no
implied covenants or obligations shall be read into this Indenture
against the Trustee; and
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(2) in the absence of bad faith on its part, the Trustee may
conclusively rely, as to the truth of the statements and the
correctness of the opinions expressed therein, upon certificates or
opinions furnished to the Trustee and conforming to the requirements of
this Indenture. However, the Trustee shall examine the certificates and
opinions to determine whether or not they conform to the requirements
of this Indenture.
(c) The Trustee may not be relieved from liability for its own
negligent action, its own negligent failure to act or its own wilful misconduct,
except that:
(1) this paragraph does not limit the effect of
paragraph (b) of this Section;
(2) the Trustee shall not be liable for any error of judgment
made in good faith by a Trust Officer unless it is proved that the
Trustee was negligent in ascertaining the pertinent facts; and
(3) the Trustee shall not be liable with respect to any action
it takes or omits to take in good faith in accordance with a direction
received by it pursuant to Section 6.05.
(d) Every provision of this Indenture that in any way relates
to the Trustee is subject to paragraphs (a), (b) and (c) of this Section.
(e) The Trustee shall not be liable for interest on any money
received by it except as the Trustee may agree in writing with the Company.
(f) Money held in trust by the Trustee need not be segregated
from other funds except to the extent required by law.
(g) No provision of this Indenture shall require the Trustee
to expend or risk its own funds or otherwise incur financial liability in the
performance of any of its duties hereunder or in the exercise of any of its
rights or powers, if it shall have reasonable grounds to believe that repayment
of such funds or adequate indemnity against such risk or liability is not
reasonably assured to it.
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(h) Every provision of this Indenture relating to the conduct
or affecting the liability of or affording protection to the Trustee shall be
subject to the provisions of this Section and to the provisions of the TIA.
SECTION 7.02. Rights of Trustee. (a) The Trustee may rely
on any document believed by it to be genuine and to have been signed or
presented by the proper person. The Trustee need not investigate any fact or
matter stated in the document.
(b) Before the Trustee acts or refrains from acting, it may
require an Officers' Certificate or an Opinion of Counsel. The Trustee shall not
be liable for any action it takes or omits to take in good faith in reliance on
the Officers' Certificate or Opinion of Counsel.
(c) The Trustee may act through agents and shall not be
responsible for the misconduct or negligence of any agent appointed with due
care.
(d) The Trustee shall not be liable for any action it takes or
omits to take in good faith which it believes to be authorized or within its
rights or powers; provided, however, that the Trustee's conduct does not
constitute wilful misconduct or negligence.
(e) The Trustee may consult with counsel, and the advice or
opinion of counsel with respect to legal matters relating to this Indenture and
the Securities shall be full and complete authorization and protection from
liability in respect to any action taken, omitted or suffered by it hereunder in
good faith and in accordance with the advice or opinion of such counsel.
SECTION 7.03. Individual Rights of Trustee. The Trustee in its
individual or any other capacity may become the owner or pledgee of Securities
and may otherwise deal with the Company or its Affiliates with the same rights
it would have if it were not Trustee. Any Paying Agent, Registrar, co-registrar
or co-paying agent may do the same with like rights. However, the Trustee must
comply with Sections 7.10 and 7.11.
SECTION 7.04. Trustee's Disclaimer. The Trustee shall not be
responsible for and makes no representation as to the validity or adequacy of
this Indenture or the Securities, it shall not be accountable for the
Company's use of
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the proceeds from the Securities, and it shall not be responsible for any
statement of the Company in the Indenture or in any document issued in
connection with the sale of the Securities or in the Securities other than the
Trustee's certificate of authentication.
SECTION 7.05. Notice of Defaults. If a Default occurs and is
continuing and if it is known to the Trustee, the Trustee shall mail to each
Securityholder notice of the Default within 90 days after it occurs. Except in
the case of a Default in payment of principal of or interest on any Security
(including payments pursuant to the mandatory redemption provisions of such
Security, if any), the Trustee may withhold the notice if and so long as a
committee of its Trust Officers in good faith determines that withholding the
notice is in the interests of Securityholders.
SECTION 7.06. Reports by Trustee to Holders. As promptly as
practicable after each February 1 beginning with the February 1 following the
date of this Indenture, and in any event prior to March 1 in each year, the
Trustee shall mail to each Securityholder a brief report dated as of February 1
that complies with TIA Section 313(a). The Trustee also shall comply with TIA
Section 313(b).
A copy of each report at the time of its mailing to
Securityholders shall be filed with the SEC and each stock exchange (if any) on
which the Securities are listed. The Company agrees to notify promptly the
Trustee whenever the Securities become listed on any stock exchange and of any
delisting thereof.
SECTION 7.07. Compensation and Indemnity. The Company shall
pay to the Trustee from time to time reasonable compensation for its services.
The Trustee's compensation shall not be limited by any law on compensation of a
trustee of an express trust. The Company shall reimburse the Trustee upon
request for all reasonable out-of-pocket expenses incurred or made by it. Such
expenses shall include the reasonable compensation and expenses, disbursements
and advances of the Trustee's agents and counsel. The Company shall indemnify
the Trustee against any and all loss, liability or expense (including reasonable
attorneys' fees) incurred by it in connection with the administration of this
trust and the performance of its duties hereunder, including the costs and
expenses of enforcing this Indenture against the Company (including, without
limitations, Section 7.07). The Trustee shall
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notify the Company promptly of any claim (whether asserted by any Holder or the
Company) for which it may seek indemnity. The Company shall defend the claim and
the Trustee shall cooperate in such defense and may have separate counsel and
the Company shall pay the reasonable fees and expenses of such counsel. The
Company need not reimburse any expense or indemnify against any loss, liability
or expense incurred by the Trustee through the Trustee's own wilful misconduct,
negligence or bad faith.
To secure the Company's payment obligations in this Section,
the Trustee shall have a lien prior to the Securities on all money or property
held or collected by the Trustee other than money or property held in trust to
pay principal of and interest on particular Securities.
The Company's payment obligations pursuant to this Section
shall survive the discharge of this Indenture. When the Trustee incurs expenses
after the occurrence of a Default specified in Section 6.01(7) or (8) with
respect to the Company, the expenses are intended to constitute expenses of
administration under the Bankruptcy Law.
SECTION 7.08. Replacement of Trustee. The Trustee may resign
at any time by so notifying the Company. The Holders of a majority in principal
amount at maturity of the Securities may remove the Trustee by so notifying the
Trustee and may appoint a successor Trustee. The Company shall remove the
Trustee if:
(1) the Trustee fails to comply with Section 7.10;
(2) the Trustee is adjudged bankrupt or insolvent;
(3) a receiver or other public officer takes charge of the
Trustee or its property; or
(4) the Trustee otherwise becomes incapable of acting.
If the Trustee resigns, is removed by the Company or by the
Holders of a majority in principal amount at maturity of the Securities and such
Holders do not reasonably promptly appoint a successor Trustee, or if a vacancy
exists in the office of Trustee for any reason (the Trustee in such event being
referred to herein as the retiring Trustee), the Company shall promptly appoint
a successor Trustee.
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67
A successor Trustee shall deliver a written acceptance of its
appointment to the retiring Trustee and to the Company. Thereupon the
resignation or removal of the retiring Trustee shall become effective, and the
successor Trustee shall have all the rights, powers and duties of the Trustee
under this Indenture. The successor Trustee shall mail a notice of its
succession to Securityholders. The retiring Trustee shall promptly transfer all
property held by it as Trustee to the successor Trustee, subject to the lien
provided for in Section 7.07.
If a successor Trustee does not take office within 60 days
after the retiring Trustee resigns or is removed, the retiring Trustee or the
Holders of 10% in principal amount at maturity of the Securities may petition
any court of competent jurisdiction for the appointment of a successor Trustee.
If the Trustee fails to comply with Section 7.10, any
Securityholder may petition any court of competent jurisdiction for the removal
of the Trustee and the appointment of a successor Trustee.
Notwithstanding the replacement of the Trustee pursuant to
this Section, the Company's obligations under Section 7.07 shall continue for
the benefit of the retiring Trustee.
SECTION 7.09. Successor Trustee by Merger. If the Trustee
consolidates with, merges or converts into, or transfers all or substantially
all its corporate trust business or assets to, another corporation or banking
association, the resulting, surviving or transferee corporation without any
further act shall be the successor Trustee; provided, however, that such
corporation shall be otherwise qualified and eligible under this Article 7.
In case at the time such successor or successors by merger,
conversion or consolidation to the Trustee shall succeed to the trusts created
by this Indenture any of the Securities shall have been authenticated but not
delivered, any such successor to the Trustee may adopt the certificate of
authentication of any predecessor trustee, and deliver such Securities so
authenticated; and in case at that time any of the Securities shall not have
been authenticated, any successor to the Trustee may authenticate such
Securities either in the name of any predecessor hereunder or in the name of the
successor to the Trustee; and in all such cases
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68
such certificates shall have the full force which it is anywhere in the
Securities or in this Indenture provided that the certificate of the Trustee
shall have.
SECTION 7.10. Eligibility; Disqualification. The Trustee shall
at all times satisfy the requirements of TIA Section 310(a). The Trustee shall
have a combined capital and surplus of at least $50,000,000 as set forth in its
most recent annual report of condition. The Trustee shall comply with TIA
Section 310(b); provided, however, that there shall be excluded from the
operation of TIA Section 310(b)(1) any indenture or indentures under which other
securities or certificates of interest or participation in other securities of
the Company are outstanding if the requirements for such exclusion set forth in
TIA Section 310(b)(1) are met.
SECTION 7.11. Preferential Collection of Claims Against
Company. The Trustee shall comply with TIA Section 311(a), excluding any
creditor relationship listed in TIA Section 311(b). A Trustee who has resigned
or been removed shall be subject to TIA Section 311(a) to the extent indicated.
ARTICLE 8
Discharge of Indenture; Defeasance
SECTION 8.01. Discharge of Liability on Securities;
Defeasance. (a) When (i) the Company delivers to the Trustee all outstanding
Securities (other than Securities replaced pursuant to Section 2.07) for
cancellation or (ii) all outstanding Securities have become due and payable,
whether at maturity or as a result of the mailing of a notice of redemption
pursuant to Article 3 hereof and the Company irrevocably deposits with the
Trustee funds sufficient to pay at maturity or upon redemption all outstanding
Securities, including interest thereon to maturity or such redemption date
(other than Securities replaced pursuant to Section 2.07), and if in either case
the Company pays all other sums payable hereunder by the Company, then this
Indenture shall, subject to Sections 8.01(c), cease to be of further effect. The
Trustee shall acknowledge satisfaction and discharge of this Indenture on demand
of the Company accompanied by an Officers' Certificate and an Opinion of Counsel
and at the cost and expense of the Company.
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(b) Subject to Sections 8.01(c) and 8.02, the Company at any
time may terminate (i) all its obligations under the Securities and this
Indenture ("legal defeasance option") or (ii) its obligations under Sections
4.02, 4.03, 4.04, 4.05, 4.06, 4.07, 4.08, 4.09, 4.10, 4.11, 4.12, 4.13 and 4.14
and the operation of Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8), 6.01(9) and
6.01(10) (but, in the case of Sections 6.01(7) and (8), with respect only to
Significant Subsidiaries) and the limitations contained in Sections 5.01(a)(iii)
and (iv) ("covenant defeasance option"). The Company may exercise its legal
defeasance option notwithstanding its prior exercise of its covenant defeasance
option.
If the Company exercises its legal defeasance option, payment
of the Securities may not be accelerated because of an Event of Default with
respect thereto. If the Company exercises its covenant defeasance option,
payment of the Securities may not be accelerated because of an Event of Default
specified in Sections 6.01(4), 6.01(6), 6.01(7), 6.01(8), 6.01(9) and 6.01(10)
(but, in the case of Sections 6.01(7) and (8), with respect only to Significant
Subsidiaries) or because of the failure of the Company to comply with Section
5.01(a)(iii) or (iv). If the Company exercises its legal defeasance option or
its covenant defeasance option, each Subsidiary Guarantor, if any, shall be
released from all its obligations with respect to its Subsidiary Guaranty.
Upon satisfaction of the conditions set forth herein and upon
request of the Company, the Trustee shall acknowledge in writing the discharge
of those obligations that the Company terminates.
(c) Notwithstanding clauses (a) and (b) above, the Company's
obligations in Sections 2.03, 2.04, 2.05, 2.06, 2.07, 2.08, 7.07 and 7.08 and in
this Article 8 shall survive until the Securities have been paid in full.
Thereafter, the Company's obligations in Sections 7.07, 8.04 and 8.05 shall
survive.
SECTION 8.02. Conditions to Defeasance. The Company may
exercise its legal defeasance option or its covenant defeasance option only if:
(1) the Company irrevocably deposits in trust with the Trustee
money or U.S. Government Obligations sufficient for the payment of
principal of and interest
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on the Securities to maturity or redemption, as the case may be;
(2) the Company delivers to the Trustee a certificate from a
nationally recognized firm of independent accountants expressing their
opinion that the payments of principal and interest when due and
without reinvestment on the deposited U.S. Government Obligations plus
any deposited money without investment will provide cash at such times
and in such amounts as will be sufficient to pay principal and interest
when due on all the Securities to maturity or redemption, as the case
may be;
(3) 91 days pass after the deposit is made and during the
91-day period no Default specified in Sections 6.01(7) or (8) with
respect to the Company occurs which is continuing at the end of the
period;
(4) the deposit does not constitute a default under any
other agreement binding on the Company;
(5) the Company delivers to the Trustee an Opinion of Counsel
to the effect that the trust resulting from the deposit does not
constitute, or is qualified as, a regulated investment company under
the Investment Company Act of 1940;
(6) in the case of the legal defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel stating that
(i) the Company has received from, or there has been published by, the
Internal Revenue Service a ruling, or (ii) since the date of this
Indenture there has been a change in the applicable Federal income tax
law, in either case to the effect that, and based thereon such Opinion
of Counsel shall confirm that, the Securityholders will not recognize
income, gain or loss for Federal income tax purposes as a result of
such defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such defeasance had not occurred;
(7) in the case of the covenant defeasance option, the Company
shall have delivered to the Trustee an Opinion of Counsel to the effect
that the Securityholders will not recognize income, gain or loss for
Federal income tax purposes as a result of such cove-
<PAGE> 76
71
nant defeasance and will be subject to Federal income tax on the same
amounts, in the same manner and at the same times as would have been
the case if such covenant defeasance had not occurred;
(8) the Company delivers to the Trustee an Officers'
Certificate and an Opinion of Counsel, each stating that all conditions
precedent to the defeasance and discharge of the Securities as
contemplated by this Article 8 have been complied with; and
(9) the Opinions of Counsel delivered under this Section can
contain such exceptions and conditions as are customary for such
opinions.
Before or after a deposit, the Company may make arrangements
satisfactory to the Trustee for the redemption of Securities at a future date in
accordance with Article 3.
SECTION 8.03. Application of Trust Money. The Trustee shall
hold in trust money or U.S. Government Obligations deposited with it pursuant to
this Article 8. It shall apply the deposited money and the money from U.S.
Government Obligations through the Paying Agent and in accordance with this
Indenture to the payment of principal of and interest on the Securities.
SECTION 8.04. Repayment to Company. The Trustee and the Paying
Agent shall promptly turn over to the Company upon request any excess money or
securities held by them at any time.
Subject to any applicable abandoned property law, the Trustee
and the Paying Agent shall pay to the Company upon request any money held by
them for the payment of principal or interest that remains unclaimed for two
years, and, thereafter, Securityholders entitled to the money must look to the
Company for payment as general creditors.
SECTION 8.05. Indemnity for Government Obligations. The
Company shall pay and shall indemnify the Trustee against any tax, fee or other
charge imposed on or assessed against deposited U.S. Government Obligations or
the principal and interest received on such U.S. Government Obligations.
SECTION 8.06. Reinstatement. If the Trustee or Paying Agent is
unable to apply any money or U.S. Government
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Obligations in accordance with this Article 8 by reason of any legal proceeding
or by reason of any order or judgment of any court or governmental authority
enjoining, restraining or otherwise prohibiting such application, the Company's
obligations under this Indenture and the Securities shall be revived and
reinstated as though no deposit had occurred pursuant to this Article 8 until
such time as the Trustee or Paying Agent is permitted to apply all such money or
U.S. Government Obligations in accordance with this Article 8; provided,
however, that, if the Company has made any payment of interest on or principal
of any Securities because of the reinstatement of its obligations, the Company
shall be subrogated to the rights of the Holders of such Securities to receive
such payment from the money or U.S. Government Obligations held by the Trustee
or Paying Agent.
ARTICLE 9
Amendments
SECTION 9.01. Without Consent of Holders. The Company and the
Trustee may amend this Indenture or the Securities without notice to or consent
of any Securityholder:
(1) to cure any ambiguity, omission, defect or
inconsistency;
(2) to comply with Article 5;
(3) to provide for uncertificated Securities in addition to or
in place of certificated Securities; provided, however, that the
uncertificated Securities are issued in registered form for purposes of
Section 163(f) of the Code or in a manner such that the uncertificated
Securities are described in Section 163(f)(2)(B) of the Code;
(4) to add guarantees with respect to the Securities,
including any Subsidiary Guaranties, or to secure the Securities;
(5) to add to the covenants of the Company for the
benefit of the Holders or to surrender any right or
power herein conferred upon the Company;
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73
(6) to comply with any requirements of the SEC in connection
with qualifying, or maintaining the qualification of, this Indenture
under the TIA; or
(7) to make any change that does not adversely affect the
rights of any Securityholder.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section.
SECTION 9.02. With Consent of Holders. The Company and the
Trustee may amend this Indenture or the Securities without notice to any
Securityholder but with the written consent of the Holders of at least a
majority in principal amount at maturity of the Securities then outstanding
(including consents obtained in connection with a tender offer or exchange for
the Securities). However, without the consent of each Securityholder affected
thereby, an amendment may not:
(1) reduce the amount of Securities whose Holders must
consent to an amendment;
(2) reduce the rate of or extend the time for payment of
interest on any Security;
(3) reduce the principal or Accreted Value of or extend the
Stated Maturity of any Security;
(4) reduce the premium payable upon the redemption of any
Security or change the time at which any Security may be redeemed in
accordance with Article 3;
(5) make any Security payable in money other than that
stated in the Security;
(6) make any change in Section 6.04 or 6.07 or the second
sentence of this Section ; or
(7) make any change in any Subsidiary Guaranty that would
adversely affect the Securityholders.
It shall not be necessary for the consent of the Holders
under this Section to approve the particular form of
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any proposed amendment, but it shall be sufficient if such consent approves the
substance thereof.
After an amendment under this Section becomes effective, the
Company shall mail to Securityholders a notice briefly describing such
amendment. The failure to give such notice to all Securityholders, or any defect
therein, shall not impair or affect the validity of an amendment under this
Section.
SECTION 9.03. Compliance with Trust Indenture Act. Every
amendment to this Indenture or the Securities shall comply with the TIA as then
in effect.
SECTION 9.04. Revocation and Effect of Consents and Waivers. A
consent to an amendment or a waiver by a Holder of a Security shall bind the
Holder and every subsequent Holder of that Security or portion of the Security
that evidences the same debt as the consenting Holder's Security, even if
notation of the consent or waiver is not made on the Security. However, any such
Holder or subsequent Holder may revoke the consent or waiver as to such Holder's
Security or portion of the Security if the Trustee receives the notice of
revocation before the date the amendment or waiver becomes effective. After an
amendment or waiver becomes effective, it shall bind every Securityholder. An
amendment or waiver becomes effective upon the execution of such amendment or
waiver by the Trustee.
The Company may, but shall not be obligated to, fix a record
date for the purpose of determining the Securityholders entitled to give their
consent or take any other action described above or required or permitted to be
taken pursuant to this Indenture. If a record date is fixed, then
notwithstanding the immediately preceding paragraph, those Persons who were
Securityholders at such record date (or their duly designated proxies), and only
those Persons, shall be entitled to give such consent or to revoke any consent
previously given or to take any such action, whether or not such Persons
continue to be Holders after such record date. No such consent shall be valid or
effective for more than 120 days after such record date.
SECTION 9.05. Notation on or Exchange of Securities. If an
amendment changes the terms of a Security, the Trustee may require the Holder of
the Security to deliver it to the Trustee. The Trustee may place an appropriate
notation on the Security regarding the changed terms and
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75
return it to the Holder. Alternatively, if the Company or the Trustee so
determines, the Company in exchange for the Security shall issue and the Trustee
shall authenticate a new Security that reflects the changed terms. Failure to
make the appropriate notation or to issue a new Security shall not affect the
validity of such amendment.
SECTION 9.06. Trustee To Sign Amendments. The Trustee shall
sign any amendment authorized pursuant to this Article 9 if the amendment does
not adversely affect the rights, duties, liabilities or immunities of the
Trustee. If it does, the Trustee may but need not sign it. In signing such
amendment the Trustee shall be entitled to receive indemnity reasonably
satisfactory to it and to receive, and (subject to Section 7.01) shall be fully
protected in relying upon, an Officers' Certificate and an Opinion of Counsel
stating that such amendment is authorized or permitted by this Indenture.
SECTION 9.07. Payment for Consent. Neither the Company nor any
Affiliate of the Company shall, directly or indirectly, pay or cause to be paid
any consideration, whether by way of interest, fee or otherwise, to any Holder
for or as an inducement to any consent, waiver or amendment of any of the terms
or provisions of this Indenture or the Securities unless such consideration is
offered to be paid to all Holders that so consent, waive or agree to amend in
the time frame set forth in solicitation documents relating to such consent,
waiver or agreement.
ARTICLE 10
Subsidiary Guaranties
SECTION 10.01. Guaranties. Subject to Section 10.2, each
Subsidiary Guarantor unconditionally and irrevocably guarantees, jointly and
severally, to each Holder and to the Trustee and its successors and assigns (a)
the full and punctual payment within applicable grace periods of principal of
and interest on the Securities when due, whether at maturity, by acceleration,
by redemption or otherwise, and all other monetary obligations of the Company
under this Indenture and the Securities and (b) the full and punctual
performance within applicable grace periods of all other obligations of the
Company under this Indenture and the Securities (all the foregoing being
hereinafter collectively called the "Obligations"). Subject to
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76
Section 10.2, each Subsidiary Guarantor further agrees that the Obligations may
be extended or renewed, in whole or in part, without notice or further assent
from such Subsidiary Guarantor and that such Subsidiary Guarantor will remain
bound under this Article 10 notwithstanding any extension or renewal of any
Obligation.
Each Subsidiary Guarantor waives presentation to, demand of,
payment from and protest to the Company of any of the Obligations and also
waives notice of protest for nonpayment. Each Subsidiary Guarantor waives notice
of any default under the Securities or the Obligations. The obligations of each
Subsidiary Guarantor hereunder shall not be affected by (a) the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any right or
remedy against the Company or any other Person under this Indenture, the
Securities or any other agreement or otherwise; (b) any extension or renewal of
any thereof; (c) any rescission, waiver, amendment or modification of any of the
terms or provisions of this Indenture, the Securities or any other agreement;
(d) the release of any security held by any Holder or the Trustee for the
Obligations or any of them; (e) the failure of any Holder or the Trustee to
exercise any right or remedy against any other guarantor of the Obligations; or
(f) any change in the ownership of such Subsidiary Guarantor.
Each Subsidiary Guarantor further agrees that its Subsidiary
Guaranty herein constitutes a guarantee of payment, performance and compliance
when due (and not a guarantee of collection) and waives any right to require
that any resort be had by any Holder or the Trustee to any security held for
payment of the Obligations.
Except as expressly set forth in Sections 8.01(b), 10.02 and
10.06, the obligations of each Subsidiary Guarantor hereunder shall not be
subject to any reduction, limitation, impairment or termination for any reason,
including any claim of waiver, release, surrender, alteration or compromise, and
shall not be subject to any defense of setoff, counterclaim, recoupment or
termination whatsoever or by reason of the invalidity, illegality or
unenforceability of the Obligations or otherwise. Without limiting the
generality of the foregoing, the obligations of each Subsidiary Guarantor herein
shall not be discharged or impaired or otherwise affected by the failure of any
Holder or the Trustee to assert any claim or demand or to enforce any remedy
under this Indenture, the Securities or any other
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77
agreement, by any waiver or modification of any thereof, by any default, failure
or delay, willful or otherwise, in the performance of the obligations, or by any
other act or thing or omission or delay to do any other act or thing which may
or might in any manner or to any extent vary the risk of such Subsidiary
Guarantor or would otherwise operate as a discharge of such Subsidiary Guarantor
as a matter of law or equity.
Each Subsidiary Guarantor further agrees that its Guarantee
herein shall continue to be effective or be reinstated, as the case may be, if
at any time payment, or any part thereof, of principal of or interest on any
Obligation is rescinded or must otherwise be restored by any Holder or the
Trustee upon the bankruptcy or reorganization of the Company or otherwise.
In furtherance of the foregoing and not in limitation of any
other right which any Holder or the Trustee has at law or in equity against any
Subsidiary Guarantor by virtue hereof, upon the failure of the Company to pay
the principal of or interest on any Obligation when and as the same shall become
due, whether at maturity, by acceleration, by redemption or otherwise, or to
perform or comply with any other Obligation, each Subsidiary Guarantor hereby
promises to and will, upon receipt of written demand by the Trustee, forthwith
pay, or cause to be paid, in cash, to the Holders or the Trustee an amount equal
to the sum of (i) the unpaid amount of such Obligations, (ii) accrued and unpaid
interest on such Obligations (but only to the extent not prohibited by law) and
(iii) all other monetary Obligations of the Company to the Holders and the
Trustee.
Each Subsidiary Guarantor agrees that it shall not be entitled
to any right of subrogation in respect of any Obligations guaranteed hereby
until payment in full of all Obligations. Each Subsidiary Guarantor further
agrees that, as between it, on the one hand, and the Holders and the Trustee, on
the other hand, (x) the maturity of the Obligations Guaranteed hereby may be
accelerated as provided in Article 6 for the purposes of such Subsidiary
Guarantor's Subsidiary Guaranty herein, notwithstanding any stay, injunction or
other prohibition preventing such acceleration in respect of the Obligations
guaranteed hereby, and (y) in the event of any declaration of acceleration of
such obligations as provided in Article 6, such Obligations (whether or not due
and payable) shall forthwith become due
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and payable by such Subsidiary Guarantor for the purposes of this Section.
Each Subsidiary Guarantor also agrees to pay any and all costs
and expenses (including reasonable attorneys' fees) incurred by the Trustee or
any Holder in enforcing any rights under this Section.
SECTION 10.02. Limitation on Liability. Any term or provision
of this Indenture to the contrary notwithstanding, the maximum, aggregate amount
of the Obligations guaranteed hereunder by any Subsidiary Guarantor shall not
exceed the maximum amount, if any, that can be hereby guaranteed without
rendering this Indenture, as it relates to such Subsidiary Guarantor, voidable
under applicable law relating to fraudulent conveyance or fraudulent transfer or
similar laws affecting the rights of creditors generally.
SECTION 10.03. Successors and Assigns. This Article 10 shall
be binding upon each Subsidiary Guarantor and its successors and assigns and
shall enure to the benefit of the successors and assigns of the Trustee and the
Holders and, in the event of any transfer or assignment of rights by any Holder
or the Trustee, the rights and privileges conferred upon that party in this
Indenture and in the Securities shall automatically extend to and be vested in
such transferee or assignee, all subject to the terms and conditions of this
Indenture.
SECTION 10.04. No Waiver. Neither a failure nor a delay on the
part of either the Trustee or the Holders in exercising any right, power or
privilege under this Article 10 shall operate as a waiver thereof, nor shall a
single or partial exercise thereof preclude any other or further exercise of any
right, power or privilege. The rights, remedies and benefits of the Trustee and
the Holders herein expressly specified are cumulative and not exclusive of any
other rights, remedies or benefits which either may have under this Article 10
at law, in equity, by statute or otherwise.
SECTION 10.05. Modification. No modification, amendment or
waiver of any provision of this Article 10, nor the consent to any departure by
any Subsidiary Guarantor therefrom, shall in any event be effective unless the
same shall be in writing and signed by the Trustee, and then such waiver or
consent shall be effective only in the specific instance and for the purpose for
which given. No notice to
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or demand on any Subsidiary Guarantor in any case shall entitle such Subsidiary
Guarantor to any other or further notice or demand in the same, similar or other
circumstances.
SECTION 10.06. Release of Subsidiary Guarantor. Upon the sale
or other disposition (including by way of consolidation or merger) of a
Subsidiary Guarantor or the sale or disposition of all or substantially all the
assets of such Subsidiary Guarantor (in each case other than to the Company or
an Affiliate of the Company), such Subsidiary Guarantor shall be deemed released
from all obligations under this Article 10 without any further action required
on the part of the Trustee or any Holder. At the request of the Company, the
Trustee shall execute and deliver an appropriate instrument evidencing such
release.
ARTICLE 11
Miscellaneous
SECTION 11.01. Trust Indenture Act Controls. If any provision
of this Indenture limits, qualifies or conflicts with another provision which is
required to be included in this Indenture by the TIA, the required provision
shall control.
SECTION 11.02. Notices. Any notice or communication shall be
in writing and delivered in person or mailed by first-class mail addressed as
follows:
if to the Company or any Subsidiary Guarantor:
Electronic Retailing Systems International, Inc.
372 Danbury Road
Wilton, CT 06897
Attention of: Secretary
if to the Trustee:
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
Attention of: Corporate Trust Department
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The Company or the Trustee by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Securityholder shall
be mailed to the Securityholder at the Securityholder's address as it appears
on the registration books of the Registrar and shall be sufficiently given if so
mailed within the time prescribed.
Failure to mail a notice or communication to a Securityholder
or any defect in it shall not affect its sufficiency with respect to other
Securityholders. If a notice or communication is mailed in the manner provided
above, it is duly given, whether or not the addressee receives it.
SECTION 11.03. Communication by Holders with Other Holders.
Securityholders may communicate pursuant to TIA Section 312(b) with other
Securityholders with respect to their rights under this Indenture or the
Securities. The Company, each Subsidiary Guarantor, the Trustee, the Registrar
and anyone else shall have the protection of TIA Section 312(c).
SECTION 11.04. Certificate and Opinion as to Conditions
Precedent. Upon any request or application by the Company to the Trustee to take
or refrain from taking any action under this Indenture, the Company shall
furnish to the Trustee:
(1) an Officers' Certificate in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of the
signers, all conditions precedent, if any, provided for in this
Indenture relating to the proposed action have been complied with; and
(2) an Opinion of Counsel in form and substance reasonably
satisfactory to the Trustee stating that, in the opinion of such
counsel, all such conditions precedent have been complied with.
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81
SECTION 11.05. Statements Required in Certificate or Opinion.
Each certificate or opinion with respect to compliance with a covenant or
condition provided for in this Indenture shall include:
(1) a statement that the individual making such
certificate or opinion has read such covenant or condition;
(2) a brief statement as to the nature and scope of the
examination or investigation upon which the statements or opinions
contained in such certificate or opinion are based;
(3) a statement that, in the opinion of such individual, he
has made such examination or investigation as is necessary to enable
him to express an informed opinion as to whether or not such covenant
or condition has been complied with; and
(4) a statement as to whether or not, in the opinion of such
individual, such covenant or condition has been complied with.
SECTION 11.06. When Securities Disregarded. In determining
whether the Holders of the required principal amount of Securities have
concurred in any direction, waiver or consent, Securities owned by the Company
or by any Person directly or indirectly controlling or controlled by or under
direct or indirect common control with the Company shall be disregarded and
deemed not to be outstanding, except that, for the purpose of determining
whether the Trustee shall be protected in relying on any such direction, waiver
or consent, only Securities which the Trustee knows are so owned shall be so
disregarded. Also, subject to the foregoing, only Securities outstanding at
the time shall be considered in any such determination.
SECTION 11.07. Rules by Trustee, Paying Agent and Registrar.
The Trustee may make reasonable rules for action by or a meeting of
Securityholders. The Registrar and the Paying Agent may make reasonable rules
for their functions.
SECTION 11.08. Legal Holidays. A "Legal Holiday" is a
Saturday, a Sunday or a day on which banking institutions are not required to
be open in the State of New York. If a payment date is a Legal Holiday, payment
shall be made on the next succeeding day that is not a Legal Holiday, and
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82
no interest shall accrue for the intervening period. If a regular record date is
a Legal Holiday, the record date shall not be affected.
SECTION 11.09. Governing Law. This Indenture and the
Securities shall be governed by, and construed in accordance with, the laws of
the State of New York but without giving effect to applicable principles of
conflicts of law to the extent that the application of the laws of another
jurisdiction would be required thereby.
SECTION 11.10. No Recourse Against Others. Any past, present
or future director, officer, employee or stockholder, as such, of the Company
shall not have any liability for any obligations of the Company under the
Securities or this Indenture or for any claim based on, in respect of or by
reason of such obligations or their creation. By accepting a Security, each
Securityholder shall waive and release all such liability. The waiver and
release shall be part of the consideration for the issue of the Securities.
SECTION 11.11. Successors. All agreements of the Company in
this Indenture and the Securities shall bind its successors. All agreements of
the Trustee in this Indenture shall bind its successors.
SECTION 11.12. Multiple Originals. The parties may sign any
number of copies of this Indenture. Each signed copy shall be an original, but
all of them together represent the same agreement. One signed copy is enough to
prove this Indenture.
SECTION 11.13. Table of Contents; Headings. The table of
contents, cross-reference sheet and headings of the Articles and Sections of
this Indenture have been inserted for convenience of reference only, are not
intended to be
<PAGE> 88
83
considered a part hereof and shall not modify or restrict any of the terms or
provisions hereof.
IN WITNESS WHEREOF, the parties have caused this Indenture to
be duly executed as of the date first written above.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.,
by
------------------------
Name:
Title:
UNITED STATES TRUST COMPANY OF
NEW YORK,
by
------------------------
Name:
Title:
<PAGE> 89
EXHIBIT A
[FORM OF FACE OF EXCHANGE SECURITY OR PRIVATE EXCHANGE
SECURITY]
*/
**/
No. $
13 1/4% Senior Discount Notes Due 2004
Electronic Retailing Systems International, Inc., a Delaware corporation,
promises to pay to , or registered assigns, the principal sum of
Dollars on February 1, 2004.
Interest Payment Dates: February 1 and August 1.
Record Dates: January 15 and July 15.
Additional provisions of this Security are set forth on the other side of this
Security.
Dated:
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
by
-----------------------
President
-----------------------
Secretary
TRUSTEE'S CERTIFICATE OF
AUTHENTICATION
UNITED STATES TRUST COMPANY OF
NEW YORK,
as Trustee, certifies
[Seal] that this is one of
the Securities referred
to in the Indenture.
by
-----------------------------
Authorized Signatory
<PAGE> 90
2
*/ If the Security is to be issued in global form add the Global Securities
Legend from Exhibit 1 to the Rule 144A/Regulation S Appendix and the attachment
from such Exhibit 1 captioned "[TO BE ATTACHED TO GLOBAL SECURITIES] - SCHEDULE
OF INCREASES OR DECREASES IN GLOBAL SECURITY".
**/ If the Security is a Private Exchange Security issued in a Private Exchange
to an Initial Purchaser holding an unsold portion of its initial allotment, add
the Restricted Securities Legend from Exhibit 1 to the Rule 144A/Regulation S
Appendix and replace the Assignment Form included in this Exhibit A with the
Assignment Form included in such Exhibit 1.
<PAGE> 91
3
[FORM OF REVERSE SIDE OF EXCHANGE SECURITY OR PRIVATE EXCHANGE
SECURITY]
13 1/4% Senior Discount Note Due 2004
1. Interest
Electronic Retailing Systems International, Inc., a Delaware
corporation (such corporation, and its successors and assigns under the
Indenture hereinafter referred to, being herein called the "Company"), promises
to pay interest on the principal amount of this Security at the rate per annum
shown above; provided, however, that (i) if a Registration Default (as defined
in the Registration Rights Agreement) occurs, additional interest will accrue on
this Security at a rate of 0.50% per annum from and including the date on which
any such Registration Default shall occur to but excluding the earlier of (x)
the date on which all Registration Defaults have been cured and (y) the date on
which all Securities become freely transferable by Holders other than Affiliates
of the Company without further registration under the Securities Act, and (ii)
except as set forth in the foregoing clause (i), no interest shall accrue on the
Securities prior to February 1, 2000. The Company will pay interest hereon, if
any, semiannually on February 1 and August 1 of each year; provided, however,
that except for any additional interest payable pursuant to clause (i) of the
proviso to the immediately preceding sentence, the first such interest payment
date shall be August 1, 2000. Interest on the Securities will accrue from the
most recent date to which interest has been paid or, if no interest has been
paid or provided for, (i) in the case of interest payable upon Registration
Default, from the date of such default, and (ii) in the case of cash interest,
from February 1, 2000. Interest will be computed on the basis of a 360-day year
of twelve 30-day months. The Company shall pay interest on overdue principal at
the rate borne by the Securities plus 1% per annum, and it shall pay interest on
overdue installments of cash interest at such higher rate to the extent lawful.
2. Method of Payment
The Company will pay interest on the Securities (except
defaulted interest) to the Persons who are registered holders of Securities at
the close of business on the January 15 or August 15 next preceding the interest
payment date even if Securities are canceled after the record date
<PAGE> 92
4
and on or before the interest payment date. Holders must surrender Securities to
a Paying Agent to collect principal payments. The Company will pay principal and
interest in money of the United States that at the time of payment is legal
tender for payment of public and private debts. Payments in respect of
Securities (including principal, premium and interest) will be made by wire
transfer of immediately available funds to the accounts specified by the holders
thereof or, if no U.S. dollar account maintained by the payee with a bank in the
United States is designated by any holder to the Trustee or the Paying Agent at
least 30 days prior to the relevant due date for payment (or such other date as
the Trustee may accept in its discretion), by mailing a check to the registered
address of such holder.
3. Paying Agent and Registrar
Initially, United States Trust Company of New York, a trust
company with banking powers organized under the laws of the State of New York
("Trustee"), will act as Paying Agent and Registrar. The Company may appoint and
change any Paying Agent, Registrar or co-registrar without notice. The Company
or any of its domestically incorporated Wholly Owned Subsidiaries may act as
Paying Agent, Registrar or co-registrar.
4. Indenture
The Company issued the Securities under an Indenture dated as
of January 24, 1997 ("Indenture"), between the Company and the Trustee. The
terms of the Securities include those stated in the Indenture and those made
part of the Indenture by reference to the Trust Indenture Act of 1939 (15 U.S.C.
Sections 77aaa-77bbbb) as in effect on the date of the Indenture (the
"Act"). Terms defined in the Indenture and not defined herein have the meanings
ascribed thereto in the Indenture. The Securities are subject to all such terms,
and Securityholders are referred to the Indenture and the Act for a statement of
those terms.
The Securities are general unsecured obligations of the Company limited to
$147,312,000 aggregate principal amount at maturity (subject to Section 2.07 of
the Indenture). The Indenture contains certain covenants which, among other
things, limit (a) the incurrence of additional indebtedness by the Company and
certain of its subsidiaries and the issuance of preferred stock by such
subsidiaries, (b) the payment of dividends on capital stock of the Company and
the purchase, redemption or retirement of capital stock or subordinated
indebtedness, (c) certain investments, (d)
<PAGE> 93
5
certain transactions with affiliates, (e) the incurrence of liens and sale and
leaseback transactions, (f) sales of assets, including capital stock of
subsidiaries, (g) certain consolidations and mergers and (h) the Company's lines
of business. The Indenture also will prohibit certain restrictions on
distributions from subsidiaries. In addition, the Company may be obligated,
under certain circumstances, to offer to repurchase Securities at a purchase
price equal to 101% of the Accreted Value thereof, plus accrued and unpaid
interest, if any, to the date of repurchase.
5. Optional Redemption
The Securities may not be redeemed prior to February 1, 2001.
On and after that date, the Company may redeem the Securities in whole at any
time or in part from time to time at the following redemption prices (expressed
in percentages of principal amount at maturity), plus accrued interest to the
redemption date (subject to the right of Holders of record on the relevant
record date to receive interest due on the related interest payment date):
if redeemed during the 12-month period commencing
February 1 of the years set forth below:
Period Percentage
------ ----------
2001.......................................... 106.625%
2002.......................................... 103.313
2003 and thereafter........................... 100.000
6. Notice of Redemption
Notice of redemption will be mailed by first-class mail at
least 30 days but not more than 60 days before the redemption date to each
Holder of Securities to be redeemed at his registered address. Securities in
denominations larger than $1,000 may be redeemed in part but only in whole
multiples of $1,000. If money sufficient to pay the redemption price of and
accrued interest on all Securities (or portions thereof) to be redeemed on the
redemption date is deposited with the Paying Agent on or before the redemption
date and certain other conditions are satisfied, on and after such date interest
ceases to accrue on such Securities (or such portions thereof) called for
redemption.
<PAGE> 94
6
7. Put Provisions
Upon a Change of Control, any Holder of Securities will have
the right to cause the Company to repurchase all or any part of the Securities
of such Holder at a repurchase price equal to 101% of the Accreted Value of the
Securities to be repurchased plus accrued interest to the date of repurchase
(subject to the right of holders of record on the relevant record date to
receive interest due on the related interest payment date) as provided in, and
subject to the terms of, the Indenture.
8. Denominations; Transfer; Exchange
The Securities are in registered form without coupons in
denominations of $1,000 and whole multiples of $1,000. A Holder may transfer or
exchange Securities in accordance with the Indenture. The Registrar may require
a Holder, among other things, to furnish appropriate endorsements or transfer
documents and to pay any taxes and fees required by law or permitted by the
Indenture. The Registrar need not register the transfer of or exchange any
Securities selected for redemption (except, in the case of a Security to be
redeemed in part, the portion of the Security not to be redeemed) or any
Securities for a period of 15 days before a selection of Securities to be
redeemed or 15 days before an interest payment date.
9. Persons Deemed Owners
The registered Holder of this Security may be treated as the
owner of it for all purposes.
10. Unclaimed Money
If money for the payment of principal or interest remains
unclaimed for two years, the Trustee or Paying Agent shall pay the money back to
the Company at its request unless an abandoned property law designates another
Person. After any such payment, Holders entitled to the money must look only to
the Company and not to the Trustee for payment.
11. Discharge and Defeasance
Subject to certain conditions, the Company at any time may
terminate some or all of its obligations under the Securities and the Indenture
if the Company deposits with the Trustee money or U.S. Government Obligations
for the payment of principal and interest on the Securities to redemption or
maturity, as the case may be.
<PAGE> 95
7
12. Amendment, Waiver
Subject to certain exceptions set forth in the Indenture, (i)
the Indenture or the Securities may be amended with the written consent of the
Holders of at least a majority in principal amount at maturity outstanding of
the Securities and (ii) any default or noncompliance with any provision may be
waived with the written consent of the Holders of a majority in principal amount
at maturity outstanding of the Securities. Subject to certain exceptions set
forth in the Indenture, without the consent of any Securityholder, the Company
and the Trustee may amend the Indenture or the Securities to cure any ambiguity,
omission, defect or inconsistency, or to comply with Article 5 of the Indenture,
or to provide for uncertificated Securities in addition to or in place of
certificated Securities, or to add guarantees with respect to the Securities or
to secure the Securities, or to add additional covenants or surrender rights and
powers conferred on the Company, or to comply with any request of the SEC in
connection with qualifying the Indenture under the Act, or to make any change
that does not adversely affect the rights of any Securityholder.
13. Defaults and Remedies
Under the Indenture, Events of Default include (i) default for
30 days in payment of interest on the Securities; (ii) default in payment of
principal on the Securities at maturity, upon redemption pursuant to paragraph 5
of the Securities, upon acceleration or otherwise, or failure by the Company to
redeem or purchase Securities when required; (iii) failure by the Company to
comply with other agreements in the Indenture or the Securities, in certain
cases subject to notice and lapse of time; (iv) certain accelerations (including
failure to pay within any grace period after final maturity) of other
Indebtedness of the Company if the amount accelerated (or so unpaid) exceeds $10
million; (v) certain events of bankruptcy or insolvency with respect to the
Company and the Significant Subsidiaries; (vi) certain judgments or decrees for
the payment of money in excess of $10 million; and (vii) certain events with
respect to the guarantees of the Company's obligations under the Securities by
certain of its subsidiaries. If an Event of Default occurs and is continuing,
the Trustee or the Holders of at least 25% in principal amount at maturity of
the Securities may declare all the Securities to be due and payable immediately.
Certain events of bankruptcy or insolvency are Events of Default which will
result in the Securities being due and
<PAGE> 96
8
payable immediately upon the occurrence of such Events of Default.
Securityholders may not enforce the Indenture or the
Securities except as provided in the Indenture. The Trustee may refuse to
enforce the Indenture or the Securities unless it receives reasonable indemnity
or security. Subject to certain limitations, Holders of a majority in principal
amount at maturity of the Securities may direct the Trustee in its exercise of
any trust or power. The Trustee may withhold from Securityholders notice of any
continuing Default (except a Default in payment of principal or interest) if it
determines that withholding notice is in the interest of the Holders.
14. Trustee Dealings with the Company
Subject to certain limitations imposed by the Act, the Trustee
under the Indenture, in its individual or any other capacity, may become the
owner or pledgee of Securities and may otherwise deal with and collect
obligations owed to it by the Company or its Affiliates and may otherwise deal
with the Company or its Affiliates with the same rights it would have if it were
not Trustee.
15. No Recourse Against Others
Any past, present or future director, officer, employee or
stockholder, as such, of the Company or the Trustee shall not have any liability
for any obligations of the Company under the Securities or the Indenture or for
any claim based on, in respect of or by reason of such obligations or their
creation. By accepting a Security, each Securityholder waives and releases all
such liability. The waiver and release are part of the consideration for the
issue of the Securities.
16. Authentication
This Security shall not be valid until an authorized signatory
of the Trustee (or an authenticating agent) manually signs the certificate of
authentication on the other side of this Security.
17. Abbreviations
Customary abbreviations may be used in the name of a
Securityholder or an assignee, such as TEN COM (=tenants in common), TEN ENT
(=tenants by the entireties), JT TEN (=joint tenants with rights of survivorship
and not as
<PAGE> 97
9
tenants in common), CUST (=custodian), and U/G/M/A (=Uniform Gift to Minors
Act).
18. CUSIP NUMBERS
Pursuant to a recommendation promulgated by the Committee on
Uniform Security Identification Procedures the Company has caused CUSIP numbers
to be printed on the Securities and has directed the Trustee to use CUSIP
numbers
in notices of redemption as a convenience to Securityholders. No representation
is made as to the accuracy of such numbers either as printed on the Securities
or as contained in any notice of redemption and reliance may be placed only on
the other identification numbers placed thereon.
19. Holders' Compliance with Registration Rights Agreement.
Each Holder of a Security, by acceptance hereof, acknowledges
and agrees to the provisions of the Registration Rights Agreement, including,
without limitation, the obligations of the Holders with respect to a
registration and the indemnification of the Company to the extent provided
therein.
20. Governing Law.
THIS SECURITY SHALL BE GOVERNED BY, AND CONSTRUED IN
ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK BUT WITHOUT GIVING EFFECT TO
APPLICABLE PRINCIPLES OF CONFLICTS OF LAW TO THE EXTENT THAT THE APPLICATION OF
THE LAWS OF ANOTHER JURISDICTION WOULD BE REQUIRED THEREBY.
THE COMPANY WILL FURNISH TO ANY SECURITYHOLDER UPON WRITTEN
REQUEST AND WITHOUT CHARGE TO THE SECURITY- HOLDER A COPY OF THE INDENTURE WHICH
HAS IN IT THE TEXT OF THIS SECURITY IN LARGER TYPE. REQUESTS MAY BE MADE TO:
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
372 DANBURY ROAD
WILTON, CT 06897
ATTENTION OF: SECRETARY
ASSIGNMENT FORM
To assign this Security, fill in the form below:
<PAGE> 98
10
I or we assign and transfer this Security to
(Print or type assignee's name, address and zip code)
(Insert assignee's soc. sec. or tax I.D. No.)
and irrevocably appoint agent to
transfer this Security on the books of the Company. The
agent may substitute another to act for him.
____________________________________________________________
________________
Date: ________________ Your Signature: _____________________
____________________________________________________________
________________
Sign exactly as your name appears on the other side of this Security.
<PAGE> 99
11
OPTION OF HOLDER TO ELECT PURCHASE
IF YOU WANT TO ELECT TO HAVE THIS SECURITY PURCHASED BY THE
COMPANY PURSUANT TO SECTION 4.07 OR 4.10 OF THE INDENTURE, CHECK THE BOX:
/ /
IF YOU WANT TO ELECT TO HAVE ONLY PART OF THIS SECURITY
PURCHASED BY THE COMPANY PURSUANT TO SECTION 4.07 OR 4.10 OF THE INDENTURE,
STATE THE AMOUNT:
DATE: __________________ YOUR SIGNATURE: __________________
(SIGN EXACTLY AS YOUR NAME APPEARS
ON THE OTHER SIDE OF THE SECURITY)
SIGNATURE GUARANTEE:_______________________________________
(SIGNATURE MUST BE GUARANTEED BY A
MEMBER FIRM OF THE NEW YORK STOCK
EXCHANGE OR A COMMERCIAL BANK OR TRUST
COMPANY)
<PAGE> 1
EXHIBIT 4.3
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
$147,312,000
13 1/4% Senior Discount Notes Due 2004
REGISTRATION RIGHTS AGREEMENT
January 20, 1997
Credit Suisse First Boston Corporation
UBS Securities LLC
In care of Credit Suisse First Boston Corporation
As Representative of the Several Initial Purchasers
11 Madison Avenue
New York, New York 10010
Ladies and Gentlemen:
Electronic Retailing Systems International, Inc., a Delaware
corporation (the "Company"), proposes, subject to the terms and conditions
stated in a purchase agreement of even date herewith (the "Purchase Agreement"),
to issue and sell to Credit Suisse First Boston Corporation and UBS Securities
LLC (collectively, the "Initial Purchasers"), 147,312 Units, each consisting of
13 1/4% Senior Discount Notes Due 2004 with a principal amount at maturity of
$1,000 (collectively the "Notes") and one warrant (collectively, the "Warrants")
to purchase 17.23 shares of the common stock, par value $.01 per share, of the
Company ("Common Stock"). The Notes will be issued pursuant to an indenture
dated as of January 24, 1997 (the "Indenture"), between the Company and United
States Trust Company of New York, as trustee (the "Trustee"). This Agreement
will have no force and effect until the Notes are issued. As an inducement to
the Initial Purchasers, the Company hereby agrees with the several Initial
Purchasers, for the benefit of the holders of the Notes (including, without
limitation, the Initial Purchasers), the Exchange Notes (as defined below) and
the Private Exchange Notes (as defined below) (collectively, the "Holders"), as
follows:
<PAGE> 2
2
1. Registered Exchange Offer. The Company shall, at its cost, prepare
and, not later than 45 days after (or if the 45th day is not a business day, the
first business day thereafter) the Issue Date (as defined in the Indenture) of
the Notes, file with the Securities and Exchange Commission (the "Commission") a
registration statement (the "Exchange Offer Registration Statement") on an
appropriate form under the Securities Act of 1933, as amended (the "Securities
Act"), with respect to a proposed offer (the "Registered Exchange Offer") to the
Holders of Transfer Restricted Notes (as defined below), who are not prohibited
by any law or policy of the Commission from participating in the Registered
Exchange Offer, to issue and deliver to such Holders, in exchange for the Notes,
a like aggregate principal amount of debt securities (the "Exchange Notes") of
the Company issued under the Indenture and identical in all material respects to
the Notes (except for the transfer restrictions relating to the Notes) that
would be registered under the Securities Act. The Company shall use its
reasonable best efforts to cause such Exchange Offer Registration Statement to
become effective under the Securities Act within 150 days (or if the 150th day
is not a business day, the first business day thereafter) after the Issue Date
of the Notes and shall keep the Exchange Offer Registration Statement effective
for not less than 30 days (or longer if required by applicable law) after the
date on which notice of the Registered Exchange Offer is mailed to the Holders
(such period being called the "Exchange Offer Registration Period").
If the Company effects the Registered Exchange Offer, the Company will
be entitled to close the Registered Exchange Offer 30 days after the
commencement thereof; provided, however, that the Company has accepted all the
Notes theretofore validly tendered in accordance with the terms of the
Registered Exchange Offer.
<PAGE> 3
3
Following the declaration of the effectiveness of the Exchange Offer
Registration Statement, the Company shall promptly commence the Registered
Exchange Offer, it being the objective of such Registered Exchange Offer to
enable each Holder of Transfer Restricted Notes electing to exchange the Notes
for Exchange Notes (assuming that such Holder is not an affiliate of the Company
within the meaning of the Securities Act, acquires the Exchange Notes in the
ordinary course of such Holder's business, has no arrangements with any person
to participate in the distribution (within the meaning of the Securities Act) of
the Exchange Notes and is not prohibited by any law or policy of the Commission
from participating in the Registered Exchange Offer) to trade such Exchange
Notes from and after their receipt without any limitations or restrictions under
the Securities Act and without material restrictions under the securities laws
of the several states of the United States. In connection with such Registered
Exchange Offer, the Company shall take such further action, including, without
limitation, appropriate filings under state securities laws, as may be necessary
to realize the foregoing objective subject to the proviso of Section 3(h).
The Company acknowledges that, pursuant to current interpretations by
the Commission's staff of Section 5 of the Securities Act, in the absence of an
applicable exemption therefrom, (i) each Holder that is a broker-dealer electing
to exchange Notes, acquired for its own account as a result of market making
activities or other trading activities, for Exchange Notes (an "Exchanging
Dealer"), is required to deliver a prospectus containing the information set
forth in Annex A hereto on the cover, in Annex B hereto in the "Exchange Offer
Procedures" section and the "Purpose of the Exchange Offer" section, and in
Annex C hereto in the "Plan of Distribution" section of such prospectus in
connection with a sale of any such Exchange Notes received by such Exchanging
Dealer pursuant to the Registered Exchange Offer and (ii) an Initial Purchaser
that elects to
<PAGE> 4
4
sell Exchange Notes acquired in exchange for Notes constituting any portion of
an unsold allotment is required to deliver a prospectus containing the
information required by Items 507 or 508 of Regulation S-K under the Securities
Act, as applicable, in connection with such sale.
The Company shall use its reasonable best efforts to keep the Exchange
Offer Registration Statement effective and to amend and supplement the
prospectus contained therein in order to permit such prospectus to be lawfully
delivered by all persons subject to the prospectus delivery requirements of the
Securities Act for such period of time as such persons must comply with such
requirements in order to resell the Exchange Notes; provided, however, that (i)
in the case where such prospectus and any amendment or supplement thereto must
be delivered by an Exchanging Dealer or an Initial Purchaser, such period shall
be the lesser of 180 days after the expiration date of the Registered Exchange
Offer and the date on which all Exchanging Dealers and the Initial Purchasers
have sold all Exchange Notes held by them (unless such period is extended
pursuant to Section 3(j) below), and (ii) the Company shall make such prospectus
and any amendment or supplement thereto available to any broker-dealer for use
in connection with any resale of any Exchange Notes for a period not less than
90 days after the consummation of the Registered Exchange Offer.
If, upon consummation of the Registered Exchange Offer, any Initial
Purchaser holds Notes acquired by it as part of its initial distribution, the
Company, simultaneously with the delivery of the Exchange Notes pursuant to the
Registered Exchange Offer, shall issue and deliver to such Initial Purchaser
upon the written request of such Initial Purchaser, in exchange (the "Private
Exchange") for the Notes held by such Initial Purchaser, a like principal amount
of debt securities of the Company issued under the Indenture and identical in
all material respects (including the existence of restrictions on
<PAGE> 5
5
transfer under the Securities Act and the securities laws of the several states
of the United States) to the Notes (the "Private Exchange Notes"). The Notes,
the Exchange Notes and the Private Exchange Notes are herein collectively called
the "Securities".
In connection with the Registered Exchange Offer, the Company shall:
(a) mail to each Holder a copy of the prospectus forming part of
the Exchange Offer Registration Statement, together with an appropriate
letter of transmittal and related documents;
(b) keep the Registered Exchange Offer open for not less than 30
days (or longer, if required by applicable law) after the date notice
thereof is mailed to the Holders;
(c) utilize the services of a depositary for the Registered
Exchange Offer with an address in the Borough of Manhattan, The City of
New York, which may be the Trustee or an affiliate of the Trustee;
(d) permit Holders to withdraw tendered Notes at any time prior to
the close of business, New York time, on the last business day on which
the Registered Exchange Offer shall remain open; and
(e) otherwise comply in all material respects with all applicable
law.
As soon as practicable after the close of the Registered
Exchange Offer or the Private Exchange, as the case may be, the Company shall:
(i) accept for exchange all the Notes validly tendered and not
withdrawn pursuant to the Registered
<PAGE> 6
6
Exchange Offer or the Private Exchange, as the case may be;
(ii) deliver to the Trustee for cancellation all the Notes so
accepted for exchange; and
(iii) cause the Trustee to authenticate and promptly deliver to
each Holder of the Notes, Exchange Notes or Private Exchange Notes, as
the case may be, equal in principal amount to the Notes of each Holder
so accepted for exchange.
The Indenture will provide that the Exchange Notes will not be subject
to the transfer restrictions set forth in the Indenture and that all the
Securities will vote and consent together on all matters as one class and that
none of the Securities will have the right to vote or consent as a class
separate from one another on any matter.
Each Holder participating in the Registered Exchange Offer shall be
required to represent to the Company that at the time of the consummation of the
Registered Exchange Offer (i) any Exchange Notes received by such Holder will be
acquired in the ordinary course of business, (ii) such Holder will have no
arrangements or understanding with any person to participate in the distribution
of the Notes or the Exchange Notes within the meaning of the Securities Act,
(iii) such Holder is not an "affiliate", as defined in Rule 405 of the
Securities Act, of the Company or, if it is an affiliate, such Holder will
comply with the registration and prospectus delivery requirements of the
Securities Act to the extent applicable, (iv) if such Holder is not a
broker-dealer, that it is not engaged in, and does not intend to engage in, the
distribution of the Exchange Notes, and (v) if such Holder is a broker-dealer,
that it will receive Exchange Notes for its own account in exchange for Notes
that were acquired as a result of market-making activities or other trading
activities and that it will
<PAGE> 7
7
deliver a prospectus in connection with any resale of such Exchange Notes.
Notwithstanding any other provisions hereof, the Company will ensure
that (i) any Exchange Offer Registration Statement and any amendment thereto and
any prospectus forming part thereof and any supplement thereto will comply in
all material respects with the Securities Act and the rules and regulations
thereunder, (ii) any Exchange Offer Registration Statement and any amendment
thereto does not, when it becomes effective, contain an untrue statement of a
material fact or omit to state a material fact required to be stated therein or
necessary to make the statements therein not misleading and (iii) any prospectus
forming part of any Exchange Offer Registration Statement, and any supplement to
such prospectus, will not include an untrue statement of a material fact or omit
to state a material fact required to be stated therein or necessary in order to
make the statements therein, in the light of the circumstances under which they
were made, not misleading; provided, however, that in no such case shall the
Company be responsible for information concerning any Initial Purchaser of the
Securities included in the Exchange Offer Registration Statement, the prospectus
contained therein, or any amendment or supplement thereto, as the case may be.
2. Shelf Registration. If (i) because of any change in law or in
applicable interpretations thereof by the staff of the Commission, the Company
is not permitted to effect a Registered Exchange Offer, as contemplated by
Section 1 hereof, (ii) the Registered Exchange Offer is not consummated within
180 days of the date of this Agreement, (iii) any Initial Purchaser so requests
with respect to the Notes (or the Private Exchange Notes) not eligible to be
exchanged for Exchange Notes in the Registered Exchange Offer and held by it
following consummation of the Registered Exchange Offer or (iv) any Holder
(other than an Exchanging Dealer) is not eligible to participate in the
<PAGE> 8
8
Registered Exchange Offer or, in the case of any Holder (other than an
Exchanging Dealer) that participates in the Registered Exchange Offer, such
Holder does not receive freely tradeable Exchange Notes on the date of the
exchange, the Company shall take the following actions:
(a) The Company shall, at its cost, as promptly as practicable
(but in no event more than the later of (i) 45 days after the Issue
Date and (ii) 30 days after so required or requested pursuant to this
Section 2) file with the Commission and thereafter shall use its
reasonable best efforts to cause to be declared effective a
registration statement (the "Shelf Registration Statement" and,
together with the Exchange Offer Registration Statement, a
"Registration Statement") on an appropriate form under the Securities
Act relating to the offer and sale of the Transfer Restricted Notes by
the Holders thereof from time to time in accordance with the methods of
distribution set forth in the Shelf Registration Statement and Rule 415
under the Securities Act (hereinafter, the "Shelf Registration");
provided, however, that no Holder (other than an Initial Purchaser)
shall be entitled to have the Securities held by it covered by such
Shelf Registration Statement unless such Holder agrees in writing to be
bound by all the provisions of this Agreement applicable to such Holder
(including certain indemnification obligations).
(b) The Company shall use its reasonable best efforts to keep the
Shelf Registration Statement continuously effective in order to permit
the prospectus included therein to be lawfully delivered by the Holders
of the relevant Securities, for a period of three years (or for such
longer period if extended pursuant to Section 3(j) below) from the
Issue Date or such shorter period that will terminate when all the
Securities covered by the Shelf Registration Statement
<PAGE> 9
9
have been sold pursuant thereto or can be sold pursuant to Rule 144(k)
thereof. Subject to Section 6(b), the Company shall be deemed not to
have used its reasonable best efforts to keep the Shelf Registration
Statement effective during the requisite period if it voluntarily takes
any action that would result in Holders of Securities covered thereby
not being able to offer and sell such Securities during that period,
unless such action is required by applicable law; provided, however,
that the Company shall not be deemed to have voluntarily taken any such
action if it enters, in good faith, into negotiations concerning, or
executes and delivers any agreement or other document relating to, any
business combination, acquisition or disposition.
(c) Notwithstanding any other provisions of this Agreement to the
contrary, the Company shall cause the Shelf Registration Statement and
the related prospectus and any amendment or supplement thereto, as of
the effective date of the Shelf Registration Statement, amendment or
supplement, (i) to comply in all material respects with the applicable
requirements of the Securities Act and the rules and regulations of the
Commission and (ii) not to contain any untrue statement of a material
fact or omit to state a material fact required to be stated therein or
necessary in order to make the statements therein, in light of the
circumstances under which they were made, not misleading.
3. Registration Procedures. In connection with any Shelf
Registration contemplated by Section 2 hereof and, to the extent
applicable, any Registered Exchange Offer contemplated by Section 1
hereof, the following provisions shall apply:
(a) The Company shall (i) furnish to each Initial Purchaser,
prior to the filing thereof with the
<PAGE> 10
10
Commission, a copy of the Registration Statement and each amendment
thereof and each supplement, if any, to the prospectus included therein
and, in the event that an Initial Purchaser (with respect to any
portion of an unsold allotment from the original offering) is
participating in the Registered Exchange Offer or the Shelf
Registration Statement, shall use its reasonable best efforts to
reflect in each such document, when so filed with the Commission, such
comments as such Initial Purchaser reasonably may propose; (ii) include
the information set forth in Annex A hereto on the cover, in Annex B
hereto in the "Exchange Offer Procedures" section and the "Purpose of
the Exchange Offer" section and in Annex C hereto in the "Plan of
Distribution" section of the prospectus forming a part of the Exchange
Offer Registration Statement and include the information set forth in
Annex D hereto in the Letter of Transmittal delivered pursuant to the
Registered Exchange Offer; (iii) if requested by an Initial Purchaser,
include the information required by Items 507 or 508 of Regulation S-K
under the Securities Act, as applicable, in the prospectus forming a
part of the Exchange Offer Registration Statement; (iv) include within
the prospectus contained in the Exchange Offer Registration Statement a
section entitled "Plan of Distribution", reasonably acceptable to the
Initial Purchasers, which shall contain a summary statement of the
positions taken or policies made by the staff of the Commission with
respect to the potential "underwriter" status of any broker-dealer that
is the beneficial owner (as defined in Rule 13d-3 under the Securities
Exchange Act of 1934, as amended (the "Exchange Act")) of Exchange
Notes received by such broker-dealer in the Registered Exchange Offer
(a "Participating Broker-Dealer"), whether such positions or policies
have been publicly disseminated by the staff of the Commission or such
positions or policies, in the reasonable judgment of the Initial
Purchasers
<PAGE> 11
11
based upon advice of counsel (which may be in-house counsel), represent
the prevailing views of the staff of the Commission; and (v) in the
case of a Shelf Registration Statement, include the names of the
Holders who propose to sell Securities pursuant to the Shelf
Registration Statement as selling securityholders.
(b) The Company shall give written notice to the Initial
Purchasers, the Holders of the Securities and any Participating
Broker-Dealer from whom the Company has received prior written notice
that it will be a Participating Broker-Dealer in the Registered
Exchange Offer (which notice pursuant to clauses (ii)-(v) hereof shall
be accompanied by an instruction to suspend the use of the prospectus
until the requisite changes have been made):
(i) when the Registration Statement or any amendment
thereto has been filed with the Commission and when the
Registration Statement or any post-effective amendment thereto
has become effective;
(ii) of any request by the Commission for amendments or
supplements to the Registration Statement or the prospectus
included therein or for additional information (provided,
however, that with respect to any requests prior to the
effectiveness of the Registration Statement, the Company shall
be required to give written notice only to the Initial
Purchasers and their counsel, Cravath, Swaine & Moore);
(iii) of the issuance by the Commission of any stop
order suspending the effectiveness of the Registration
Statement or the initiation of any proceedings for that
purpose;
<PAGE> 12
12
(iv) of the receipt by the Company or its legal counsel
of any notification with respect to the suspension of the
qualification of the Securities for sale in any jurisdiction
or the initiation or threatening of any proceeding for such
purpose; and
(v) of the happening of any event that requires the
Company to make changes in the Registration Statement or the
prospectus in order that the Registration Statement or the
prospectus does not contain an untrue statement of a material
fact nor omit to state a material fact required to be stated
therein or necessary to make the statements therein, in light
of the circumstances under which they were made, not
misleading.
(c) The Company shall make every reasonable effort to obtain the
withdrawal at the earliest possible time of any order suspending the
effectiveness of the Registration Statement.
(d) The Company shall furnish to each Holder of Securities
included within the coverage of the Shelf Registration, without charge,
at least one copy of the Shelf Registration Statement and any
post-effective amendment thereto, including financial statements and
schedules, and, if the Holder so requests in writing, all exhibits
thereto (including those, if any, incorporated by reference).
(e) The Company shall deliver to each Exchanging Dealer and each
Initial Purchaser, and to any other Holder who so requests, without
charge, at least one copy of the Exchange Offer Registration Statement
and any post-effective amendment thereto, including financial
statements and schedules, and, if any Initial
<PAGE> 13
13
Purchaser or any such Holder requests, all exhibits thereto (including
those incorporated by reference).
(f) The Company shall deliver to each Holder of Securities
included within the coverage of the Shelf Registration, without charge,
as many copies of the prospectus (including each preliminary
prospectus) included in the Shelf Registration Statement and any
amendment or supplement thereto as such person may reasonably request.
The Company consents, subject to the provisions of this Agreement, to
the use of the prospectus or any amendment or supplement thereto
included in the Shelf Registration Statement by each of the selling
Holders of the Securities in connection with the offering and sale of
the Securities covered by such prospectus, or any such amendment
supplement.
(g) The Company shall deliver to each Initial Purchaser, any
Exchanging Dealer, any Participating Broker-Dealer and such other
persons required to deliver a prospectus following the Registered
Exchange Offer, without charge, as many copies of the final prospectus
included in the Exchange Offer Registration Statement and any amendment
or supplement thereto as such persons may reasonably request. The
Company consents, subject to the provisions of this Agreement, to the
use of the prospectus or any amendment or supplement thereto by any
Initial Purchaser, if necessary, any Participating Broker-Dealer and
such other persons required to deliver a prospectus following the
Registered Exchange Offer in connection with the offering and sale of
the Exchange Notes covered by the prospectus, or any amendment or
supplement thereto, included in such Exchange Offer Registration
Statement.
(h) Prior to any public offering of the Securities, pursuant to
any Registration Statement, the
<PAGE> 14
14
Company shall use its reasonable best efforts to register or qualify or
cooperate with the Holders of the Securities included therein and their
respective counsel in connection with the registration or qualification
of the Securities for offer and sale under the securities or "blue sky"
laws of such states of the United States as any Holder of the
Securities reasonably requests in writing and do any and all other acts
or things necessary or advisable to enable the offer and sale in such
jurisdictions of the Securities covered by such Registration Statement;
provided, however, that the Company shall not be required to (i)
qualify generally to do business in any jurisdiction where it is not
then so qualified, (ii) take any action which would subject it to
general service of process or to taxation in any jurisdiction where it
is not then so subject or (iii) register or qualify Securities or take
any other action under the securities or "blue sky" laws of any
jurisdiction if, in the judgment of the Board of Directors of the
Company, the consequences of such registration, qualification or other
action would be unduly burdensome to the Company.
(i) The Company shall cooperate with the Holders of the
Securities to facilitate the timely preparation and delivery of
certificates representing the Securities to be sold pursuant to any
Registration Statement free of any restrictive legends and in such
denominations and registered in such names as the Holders may request a
reasonable period of time prior to sales of the Securities pursuant to
such Registration Statement.
(j) Upon the occurrence of any event contemplated by paragraphs
(ii) through (v) of Section 3(b) above during the period for which the
Company is required to maintain an effective Registration Statement,
the
<PAGE> 15
15
Company shall promptly prepare and file a post-effective amendment to
the Registration Statement or a supplement to the related prospectus
and any other required document so that, as thereafter delivered to
Holders of the Notes or purchasers of Securities, the prospectus will
not contain an untrue statement of a material fact or omit to state any
material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which they were
made, not misleading. If the Company notifies the Initial Purchasers,
the Holders of the Securities and any known Participating Broker-Dealer
in accordance with paragraphs (ii) through (v) of Section 3(b) above to
suspend the use of the prospectus until the requisite changes to the
prospectus have been made, then the Initial Purchasers, the Holders of
the Securities and any such Participating Broker-Dealers shall suspend
use of such prospectus, and the period of effectiveness of the Shelf
Registration Statement provided for in Section 2(b) above and the
Exchange Offer Registration Statement provided for in Section 1 above
shall each be extended (i) by the number of days from and including the
date of the giving of such notice to and including the date when the
Initial Purchasers, the Holders of the Securities and any known
Participating Broker-Dealer shall have received such amended or
supplemented prospectus pursuant to this Section 3(j) or (ii) if
earlier, until the date when none of the Securities represent Transfer
Restricted Notes (as defined in Section 6(d)).
(k) Not later than the effective date of the applicable
Registration Statement, the Company will provide a CUSIP number for the
Notes, the Exchange Notes or the Private Exchange Notes, as the case
may be, and provide the applicable trustee with printed certificates
for the Notes, the Exchange Notes or the
<PAGE> 16
16
Private Exchange Notes, as the case may be, in a form eligible for
deposit with The Depository Trust Company.
(l) The Company will comply with all rules and regulations of the
Commission to the extent and so long as they are applicable to the
Registered Exchange Offer or the Shelf Registration and will make
generally available to its security holders (or otherwise provide in
accordance with Section 11(a) of the Securities Act) an earnings
statement satisfying the provisions of Section 11(a) of the Securities
Act, no later than 45 days after the end of a 12-month period (or 90
days, if such period is a fiscal year) beginning with the first month
of the Company's first fiscal quarter commencing after the effective
date of the Registration Statement, which statement shall cover such
12-month period.
(m) The Company shall cause the Indenture to be qualified under
the Trust Indenture Act of 1939, as amended, in a timely manner and
containing such changes, if any, as shall be necessary for such
qualification. In the event that such qualification would require the
appointment of a new trustee under the Indenture, the Company shall
appoint a new trustee thereunder pursuant to the applicable provisions
of the Indenture.
(n) The Company may require each Holder of Securities to be sold
pursuant to the Shelf Registration Statement to furnish to the Company
such information regarding the Holder and the distribution of the
Securities as the Company may from time to time reasonably require for
inclusion in the Shelf Registration Statement, and the Company may
exclude from such registration the Securities of any Holder that
unreasonably fails to furnish such information within a reasonable time
after receiving such request.
<PAGE> 17
17
(o) The Company shall enter into such customary agreements
(including if requested an underwriting agreement in customary form)
and take all such other action, if any, as any Holder of the Securities
shall reasonably request in order to facilitate the disposition of the
Securities pursuant to any Shelf Registration.
(p) In the case of any Shelf Registration, the Company shall (i)
make reasonably available for inspection by the Holders of the
Securities, any underwriter participating in any disposition pursuant
to the Shelf Registration Statement and any attorney, accountant or
other agent retained by the Holders of the Securities or any such
underwriter all relevant financial and other records, pertinent
corporate documents and properties of the Company and (ii) cause the
Company's officers, directors, employees, accountants and auditors to
supply all relevant information reasonably requested by the Holders of
the Securities or any such underwriter, attorney, accountant or agent
in connection with the Shelf Registration Statement, in each case, as
shall be reasonably necessary, in the judgment of the Holder or any
such underwriter, attorney, accountant or agent referred to in this
paragraph, to conduct a reasonable investigation within the meaning of
Section 11 of the Securities Act; provided, however, that the foregoing
inspection and information gathering shall be coordinated on behalf of
the Initial Purchasers by you and on behalf of the other parties by one
counsel designated by and on behalf of such other parties as described
in Section 4 hereof.
(q) In the case of any Shelf Registration, the Company, if
requested by any Holder of Securities covered thereby, shall cause (i)
its counsel to deliver an opinion and updates thereof relating to the
<PAGE> 18
18
Securities in customary form addressed to such Holders and the managing
underwriters, if any, thereof and dated, in the case of the initial
opinion, the effective date of such Shelf Registration Statement
covering the matters customarily covered in opinions of counsel
requested in underwritten offerings and such other matters as may be
reasonably requested by the managing underwriter or underwriters;
provided, however, that counsel shall not be required to provide an
opinion with respect to the Company's status as an "investment company"
under the Investment Company Act of 1940 (the "1940 Act") other than a
statement with appropriate assumptions based exclusively on the status
of the Company's application to the Commission under Section 3(b)(2) or
Section 6(c) of the 1940 Act exempting the Company from the provisions
thereof; (ii) its officers to execute and deliver all customary
documents and certificates and updates thereof reasonably requested by
any underwriters of the applicable Securities; and (iii) its
independent public accountants to provide to the selling Holders of the
applicable Securities and any underwriter therefor a comfort letter in
customary form and covering matters of the type customarily covered in
comfort letters in connection with primary underwritten offerings,
subject to receipt of appropriate documentation as contemplated, and
only if permitted, by Statement of Auditing Standards No. 72.
(r) In the case of the Registered Exchange Offer, if requested by
any Initial Purchaser or any known Participating Broker-Dealer, the
Company shall cause (i) its counsel to deliver to such Initial
Purchaser or such Participating Broker-Dealer a signed opinion in the
form set forth in Section 5(c) of the Purchase Agreement with such
changes as are customary in connection with the preparation of a
Registration Statement and (ii) its independent public accountants
<PAGE> 19
19
to deliver to such Initial Purchaser or such Participating
Broker-Dealer a comfort letter, in customary form, meeting the
requirements as to the substance thereof as set forth in Section 5(a)
of the Purchase Agreement, with appropriate date changes.
(s) If a Registered Exchange Offer or a Private Exchange is to be
consummated, upon delivery of the Notes by Holders to the Company (or
to such other Person as directed by the Company) in exchange for the
Exchange Notes or the Private Exchange Notes, as the case may be, the
Company shall mark, or cause to be marked, on the Notes so exchanged
that such Notes are being cancelled in exchange for the Exchange Notes
or the Private Exchange Notes, as the case may be; in no event shall
the Notes be marked as paid or otherwise satisfied.
(t) In the event that any broker-dealer registered under the
Exchange Act shall underwrite any Securities or participate as a member
of an underwriting syndicate or selling group or "assist in the
distribution" (within the meaning of the Rules of Fair Practice and the
By-Laws of the National Association of Securities Dealers, Inc.
("NASD")) thereof, whether as a Holder of such Securities or as an
underwriter, a placement or sales agent or a broker or dealer in
respect thereof, or otherwise, the Company shall assist such
broker-dealer in complying with the requirements of such Rules and
By-Laws (including without limitation the indemnification of any
"qualified independent underwriter" required thereby).
(u) The Company will use its reasonable best efforts to cause the
Securities covered by a Registration Statement to be rated (or to have
any existing rating confirmed) by either Moody's or
<PAGE> 20
20
Standard & Poor's (or any successor to either) within two years of the
issuance of the Initial Securities.
(v) The Company shall use its reasonable best efforts to take all
other steps necessary to effect the registration of the Securities
covered by a Registration Statement contemplated hereby.
4. Registration Expenses. The Company shall bear all fees and expenses
incurred in connection with the performance of its obligations under Sections 1
through 3 hereof (including the reasonable fees and expenses of Cravath, Swaine
& Moore, counsel for the Initial Purchasers, incurred in connection with the
Registered Exchange Offer), whether or not the Registered Exchange Offer or a
Shelf Registration is filed or becomes effective, and, in the event of a Shelf
Registration, shall bear, or reimburse the Holders of the Securities covered
thereby for, the reasonable fees and disbursements of one firm of counsel
designated by the Holders of a majority in principal amount of the Securities
covered thereby to act as counsel for the Holders of the Securities in
connection therewith, it being understood that the Company shall not be
responsible for the fees and expenses of more than one counsel employed at any
one time.
5. Indemnification. The Company agrees to indemnify and hold harmless
each Holder of the Securities, any Participating Broker-Dealer and each person,
if any, who controls such Holder or such Participating Broker-Dealer within the
meaning of the Securities Act or the Exchange Act (each Holder, any
Participating Broker-Dealer and such controlling persons being referred to
collectively as the "Indemnified Parties") from and against any losses, claims,
damages or liabilities, joint or several, or any actions in respect thereof
(including, but not limited to, any losses, claims, damages, liabilities or
actions relating to purchases and sales of the Securities) to which each
<PAGE> 21
21
Indemnified Party may become subject under the Securities Act, the Exchange Act
or otherwise, insofar as such losses, claims, damages, liabilities or actions
arise out of or are based upon any untrue statement or alleged untrue statement
of a material fact contained in a Registration Statement or prospectus or in any
amendment or supplement thereto, or arise out of, or are based upon, the
omission or alleged omission to state therein a material fact required to be
stated therein or necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, and shall reimburse,
as incurred, the Indemnified Parties for any legal or other expenses reasonably
incurred by them in connection with investigating or defending any such loss,
claim, damage, liability or action in respect thereof; provided, however, that
(i) the Company shall not be liable in any such case to the extent that such
loss, claim, damage or liability arises out of or is based upon any untrue
statement or alleged untrue statement or omission or alleged omission made in a
Registration Statement or prospectus or in any amendment or supplement thereto
or in any preliminary prospectus relating to a Shelf Registration in reliance
upon and in conformity with written information pertaining to such Holder and
furnished to the Company by or on behalf of such Holder specifically for
inclusion therein, (ii) with respect to any untrue statement or omission or
alleged untrue statement or omission made in any prospectus relating to the
registration statement, the indemnity agreement contained in this subsection (a)
shall not inure to the benefit of any person as to which there is a prospectus
delivery requirement (a "Delivering Seller") that sold the Securities to the
person asserting any such losses, claims, damages or liabilities to the extent
that any such loss, claim, damage or liability of such Delivering Seller results
from the fact that there was not sent or given to such person, on or prior to
the written confirmation of such sale, a copy of the relevant prospectus, as
amended and supplemented, provided that (I) the Company shall have previously
furnished copies thereof
<PAGE> 22
22
to such Delivering Seller in accordance with this Agreement and (II) such
furnished prospectus, as amended and supplemented, would have corrected any such
untrue statement or omission or alleged untrue statement or omission, and (iii)
this indemnity agreement will be in addition to any liability which the Company
may otherwise have to such Indemnified Party. The Company shall also indemnify
underwriters, selling brokers, dealer-managers and similar securities industry
professionals participating in the distribution (in each case as described in
the Registration Statement), their officers and directors and each person who
controls such persons within the meaning of the Securities Act or the Exchange
Act to the same extent as provided above with respect to the indemnification of
the Holders of the Securities if requested by such Holders; provided, however,
that the Company shall not indemnify any such party to the extent its liability
arises from its failure to comply with the requirements described in Annexes A,
B and C hereto, as updated.
(b) Each Holder of the Securities, severally and not jointly, will
indemnify and hold harmless the Company and each person, if any, who controls
the Company within the meaning of the Securities Act or the Exchange Act from
and against any losses, claims, damages or liabilities or any actions in respect
thereof to which the Company or any such controlling person may become subject
under the Securities Act, the Exchange Act or otherwise, insofar as such losses,
claims, damages, liabilities or actions arise out of or are based upon any
untrue statement or alleged untrue statement of a material fact contained in a
Registration Statement or prospectus or in any amendment or supplement thereto
or in any preliminary prospectus relating to a Shelf Registration, or arise out
of or are based upon the omission or alleged omission to state therein a
material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, but in each case only
to the extent that the untrue statement or alleged untrue
<PAGE> 23
23
statement or omission or alleged omission was made in reliance upon and in
conformity with written information pertaining to such Holder and furnished to
the Company by or on behalf of such Holder specifically for inclusion therein;
and, subject to the limitation set forth immediately preceding this clause,
shall reimburse, as incurred, the Company for any legal or other expenses
reasonably incurred by the Company or any such controlling person in connection
with investigating or defending any loss, claim, damage, liability or action in
respect thereof. This indemnity agreement will be in addition to any liability
which such Holder may otherwise have to the Company or any of its controlling
persons.
(c) Promptly after receipt by an indemnified party under this Section 5
of notice of the commencement of any action or proceeding (including a
governmental investigation), such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this Section 5,
notify the indemnifying party of the commencement thereof; but the omission so
to notify the indemnifying party will not, in any event, relieve the
indemnifying party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above, except to the
extent that it is prejudiced or harmed in any material respect by failure to
give such prompt notice. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with one counsel (and local counsel as
necessary) reasonably satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof the indemnifying
<PAGE> 24
24
party will not be liable to such indemnified party under this Section 5 for any
legal or other expenses, other than reasonable costs of investigation,
subsequently incurred by such indemnified party in connection with the defense
thereof. No indemnifying party shall, without the prior written consent of the
indemnified party, not to be unreasonably withheld, effect any settlement of any
pending or threatened action in respect of which any indemnified party is or
could have been a party and indemnity could have been sought hereunder by such
indemnified party unless such settlement includes an unconditional release of
such indemnified party from all liability on any claims that are the subject
matter of such action. No indemnifying party shall be liable for any amounts
paid in settlement of any action or claim without its written consent, which
consent shall not be unreasonably withheld.
(d) If the indemnification provided for in this Section 5 is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a) or (b) above for any reason other than as provided in subsection
(c) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities (or actions in respect thereof) referred to in subsection (a) or (b)
above (i) in such proportion as is appropriate to reflect the relative benefits
received by the indemnifying party or parties on the one hand and the
indemnified party on the other from the exchange of the Notes, pursuant to the
Registered Exchange Offer, or (ii) if the allocation provided by the foregoing
clause (i) is not permitted by applicable law, in such proportion as is
appropriate to reflect not only the relative benefits referred to in clause (i)
above but also the relative fault of the indemnifying party or parties on the
one hand and the indemnified party on the other in connection with the
statements or omissions that resulted in such losses, claims, damages or
liabilities (or actions in respect thereof) as well as any other
<PAGE> 25
25
relevant equitable considerations. The relative fault of the parties shall be
determined by reference to, among other things, whether the untrue or alleged
untrue statement of a material fact or the omission or alleged omission to state
a material fact relates to information supplied by the Company on the one hand
or such Holder or such other indemnified person, as the case may be, on the
other, and the parties' relative intent, knowledge, access to information and
opportunity to correct or prevent such statement or omission. The amount paid by
an indemnified party as a result of the losses, claims, damages or liabilities
referred to in the first sentence of this subsection (d) shall be deemed to
include any legal or other expenses reasonably incurred by such indemnified
party in connection with investigating or defending any action or claim which is
the subject of this subsection (d). Notwithstanding any other provision of this
Section 5(d), the Holders of the Securities shall not be required to contribute
any amount in excess of the amount by which the net proceeds received by such
Holders from the sale of the Securities pursuant to a Registration Statement
exceeds the amount of damages which such Holders have otherwise been required to
pay by reason of such untrue or alleged untrue statement or omission or alleged
omission. No person guilty of fraudulent misrepresentation (within the meaning
of Section 11(f) of the Securities Act) shall be entitled to contribution from
any person who was not guilty of such fraudulent misrepresentation. For purposes
of this paragraph (d), each officer, director, employee, representative and
agent of an indemnified party and each person, if any, who controls such
indemnified party within the meaning of the Securities Act or the Exchange Act
shall have the same rights to contribution as such indemnified party, and each
officer, director, employee, representative and agent of the Company and each
person, if any, who controls the Company within the meaning of the Securities
Act or the Exchange Act shall have the same rights to contribution as the
Company.
<PAGE> 26
26
(e) The agreements contained in this Section 5 shall survive the sale
of the Securities pursuant to a Registration Statement and shall remain in full
force and effect, regardless of any termination or cancellation of this
Agreement or any investigation made by or on behalf of any indemnified party.
6. Additional Interest Under Certain Circumstances. Additional cash
interest (the "Additional Interest") with respect to the Securities shall be
assessed as follows if any of the following events occurs (each such event in
clauses (i) through (iii) below a "Registration Default"):
(i) If by March 10, 1997, neither the Exchange Offer Registration
Statement nor a Shelf Registration Statement has been filed with the
Commission;
(ii) If by July 23, 1997, neither the Registered Exchange Offer is
consummated nor, if required in lieu thereof, the Shelf Registration
Statement is declared effective by the Commission; or
(iii) If after either the Exchange Offer Registration Statement or the
Shelf Registration Statement is declared effective (A) such Registration
Statement thereafter ceases to be effective; or (B) such Registration
Statement or the related prospectus ceases to be usable (except as permitted
in paragraph (b)) in connection with resales of Transfer Restricted Notes
during the periods specified herein because either (1) any event occurs as a
result of which the related prospectus forming part of such Registration
Statement would include any untrue statement of a material fact or omit to
state any material fact necessary to make the statements therein in the
light of the circumstances under which they were made not misleading, or (2)
it shall be necessary to
<PAGE> 27
27
amend such Registration Statement or supplement the related prospectus, to
comply with the Securities Act or the Exchange Act or the respective rules
thereunder.
Additional Interest shall accrue on the Notes at a rate of 0.50% per annum of
the Accreted Value (as defined in the Indenture) (over and above the interest
set forth in the title of the Notes) from and including the date on which any
such Registration Default shall occur until the earlier of (i) the date on which
all such Registration Defaults have been cured or (ii) the date on which all the
Notes otherwise become freely transferable by holders other than affiliates of
the Company without further registration under the Securities Act.
(b) A Registration Default referred to in Section 6(a)(iii)(B) shall be
deemed not to have occurred and be continuing in relation to a Shelf
Registration Statement or the related prospectus if (i) such Registration
Default has occurred solely as a result of (x) the filing of a post-effective
amendment to such Shelf Registration Statement to incorporate annual audited or,
if required by the rules and regulations under the Securities Act, quarterly
unaudited financial information with respect to the Company where such
post-effective amendment is not yet effective and needs to be declared effective
to permit Holders to use the related prospectus or (y) other material events or
developments with respect to the Company that would need to be described in such
Shelf Registration Statement or the related prospectus and (ii) in the case of
clause (y), the Company is proceeding promptly and in good faith to amend or
supplement such Shelf Registration Statement and related prospectus to describe
such events; provided, however, that in no event shall the Company be required
to disclose the business purpose for such suspension if the Company determines
in good faith that such business purpose must remain confidential; provided
further, however, that in any case if such Registration Default
<PAGE> 28
28
occurs for a continuous period in excess of 45 days, Additional Interest shall
be payable in accordance with the above paragraph from the day following such 45
day period until the date on which such Registration Default is cured.
(c) Any Additional Interest accruing on the Notes prior to August 1,
2000, will be payable in cash on the next succeeding February 1 or August 1 to
holders of record on the immediately preceding February 1 or August 1,
respectively. Any such Additional Interest accruing on the Notes thereafter will
be payable in cash on the regular interest payment dates with respect to the
Notes to the holders of record on the applicable record date. The amount of
Additional Interest will be calculated on the Accreted Value of the Notes as of
the Specified Date on which such Additional Interest is payable.
(d) "Transfer Restricted Notes" means each Security until (i) the date
on which such Transfer Restricted Note has been exchanged by a person other than
a broker-dealer for a freely transferrable Exchange Note in the Registered
Exchange Offer, (ii) following the exchange by a broker-dealer in the Registered
Exchange Offer of a Transfer Restricted Note for an Exchange Note, the date on
which such Exchange Note is sold to a purchaser who receives from such
broker-dealer on or prior to the date of such sale a copy of the prospectus
contained in the Exchange Offer Registration Statement, (iii) the date on which
such Transfer Restricted Note has been effectively registered under the
Securities Act and disposed of in accordance with the Shelf Registration
Statement or (iv) the date on which such Transfer Restricted Note is distributed
to the public pursuant to Rule 144 under the Securities Act or is saleable
pursuant to Rule 144(k) under the Securities Act.
7. Rules 144 and 144A. The Company shall use its reasonable best
efforts to file the reports required to be filed by it under the Securities Act
and the Exchange Act in
<PAGE> 29
29
a timely manner and, if at any time the Company is not required to file such
reports, it will, upon the request of any Holder of Transfer Restricted Notes,
make publicly available other information so long as necessary to permit sales
of their securities pursuant to Rules 144 and 144A. The Company covenants that
it will take such further action as any Holder of Transfer Restricted Notes may
reasonably request, all to the extent required from time to time to enable such
Holder to sell Transfer Restricted Notes without registration under the
Securities Act within the limitation of the exemptions provided by Rules 144 and
144A (including the requirements of Rule 144A(d)(4)). The Company will provide a
copy of this Agreement to prospective purchasers of Notes identified to the
Company by the Initial Purchasers upon request. Upon the request of any Holder
of Transfer Restricted Notes, the Company shall deliver to such Holder a written
statement as to whether it has complied with such requirements. Notwithstanding
the foregoing, nothing in this Section 7 shall be deemed to require the Company
to register any of its securities pursuant to the Exchange Act.
8. Underwritten Registrations. If any of the Transfer Restricted Notes
covered by any Shelf Registration are to be sold in an underwritten offering,
the investment banker or investment bankers and manager or managers that will
administer the offering ("Managing Underwriters") will be selected by the
Holders of a majority in aggregate principal amount of such Transfer Restricted
Notes to be included in such offering (subject to the approval (which approval
shall not be unreasonably withheld) of the Company, provided, however, that the
Company shall not be obligated to arrange for more than one underwritten
offering during the period that such Shelf Registration is required to be
effective pursuant to this Agreement).
No person may participate in any underwritten registration hereunder
unless such person (i) agrees to sell such person's Transfer Restricted Notes on
the basis
<PAGE> 30
30
reasonably provided in any underwriting arrangements approved by the persons
entitled hereunder to approve such arrangements and (ii) completes and executes
all questionnaires, lock-up agreements, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements.
9. Miscellaneous.
(a) Amendments and Waivers. The provisions of this Agreement may not be
amended, modified or supplemented, and waivers or consents to departures from
the provisions hereof may not be given, except by the Company and the written
consent of the Holders of a majority in principal amount of the Securities
affected by such amendment, modification, supplement, waiver or consents.
(b) Notices. All notices and other communications provided for or
permitted hereunder shall be made in writing by hand delivery, first-class mail,
facsimile transmission, or air courier which guarantees overnight delivery:
(1) if to a Holder of the Securities, at the most current address given
by such Holder to the Company in accordance with the provisions of this
Section 9(b), which address initially is, with respect to each Holder, the
address of such Holder to which confirmation of the sale of the Notes to
such Holder was first sent by the Initial Purchasers, with a copy in like
manner to you as follows:
Credit Suisse First Boston Corporation
11 Madison Avenue
New York, NY 10010
Fax No.: (212) 325-8278
Attention: Transactions Advisory Group
<PAGE> 31
31
with a copy to:
Cravath, Swaine & Moore
Worldwide Plaza
825 Eighth Avenue
New York, New York 10019
Fax No.: (212) 474-3700
Attention: Kris F. Heinzelman
(2) if to the Initial Purchasers, at the
addresses specified in Section 9(b)(1);
(3) if to the Company, at its address as follows:
372 Danbury Road
Wilton, Connecticut 06897
Fax No: (203) 761-8875
Attention: Bruce F. Failing, Jr.
with a copy to:
Krugman, Chapnick & Grimshaw
Park 80 West - Plaza Two
Saddle Brook, NJ 07663
Fax No: (201) 845-9627
Attention: Howard Kailes
All such notices and communications shall be deemed to have been duly
given: at the time delivered by hand, if personally delivered; three business
days after being deposited in the mail, postage prepaid, if mailed; when receipt
is acknowledged by recipient's facsimile machine operator, if sent by facsimile
transmission; and on the day delivered, if sent by overnight air courier
guaranteeing next day delivery.
(c) No Inconsistent Agreements. The Company has not, as of the date
hereof, entered into, nor shall it, on
<PAGE> 32
32
or after the date hereof, enter into, any agreement with respect to its
securities that is inconsistent with the rights granted to the Holders herein or
otherwise conflicts with the provisions hereof.
(d) Successors and Assigns. This Agreement shall be binding upon the
Company and its successors and assigns.
(e) Counterparts. This Agreement may be executed in any number of
counterparts and by the parties hereto in separate counterparts, each of which
when so executed shall be deemed to be an original and all of which taken
together shall constitute one and the same agreement.
(f) Headings. The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.
(g) Governing Law. THIS AGREEMENT SHALL BE GOVERNED BY, AND CONSTRUED
IN ACCORDANCE WITH, THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO
PRINCIPLES OF CONFLICTS OF LAWS.
(h) Severability. If any one or more of the provisions contained
herein, or the application thereof in any circumstance, is held invalid, illegal
or unenforceable, the validity, legality and enforceability of any such
provision in every other respect and of the remaining provisions contained
herein shall not be affected or impaired thereby.
(i) Securities Held by the Company. Whenever the consent or approval of
Holders of a specified percentage of principal amount of Securities is required
hereunder, Securities held by the Company or its affiliates (other than
subsequent Holders of Securities if such subsequent Holders are deemed to be
affiliates solely by reason of their holdings of such Securities) shall not be
counted in
<PAGE> 33
33
determining whether such consent or approval was given by the Holders of such
required percentage.
<PAGE> 34
34
If the foregoing is in accordance with your understanding of our
agreement, please sign and return to CSFBC a counterpart hereof, whereupon this
Agreement will become a binding agreement among the Company and the several
Initial Purchasers in accordance with its terms.
Very truly yours,
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
By:______________________
Name:
Title:
The foregoing Registration
Rights Agreement is hereby confirmed
and accepted as of the date first
above written.
CREDIT SUISSE FIRST BOSTON CORPORATION
UBS SECURITIES LLC
By: CREDIT SUISSE FIRST BOSTON CORPORATION
By:_____________________________
Name:
Title:
<PAGE> 35
ANNEX A
Each broker-dealer that receives Exchange Notes for its own account
pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. The Letter of
Transmittal states that by so acknowledging and by delivering a prospectus, a
broker-dealer will not be deemed to admit that it is an "underwriter" within the
meaning of the Securities Act. This Prospectus, as it may be amended or
supplemented from time to time, may be used by a broker-dealer in connection
with resales of Exchange Notes received in exchange for Notes where such Notes
were acquired by such broker-dealer as a result of market-making activities or
other trading activities. The Company has agreed that, for a period of 180 days
after the Expiration Date (as defined herein), it will make this Prospectus
available to any broker-dealer for use in connection with any such resale. See
"Plan of Distribution."
<PAGE> 36
ANNEX B
Each broker-dealer that receives Exchange Notes for its own
account in exchange for Notes, where such Notes were acquired by such
broker-dealer as a result of market-making activities or other trading
activities, must acknowledge that it will deliver a prospectus in connection
with any resale of such Exchange Notes. See "Plan of Distribution."
<PAGE> 37
ANNEX C
PLAN OF DISTRIBUTION
Each broker-dealer that receives Exchange Notes for its own
account pursuant to the Exchange Offer must acknowledge that it will deliver a
prospectus in connection with any resale of such Exchange Notes. This
Prospectus, as it may be amended or supplemented from time to time, may be used
by a broker-dealer in connection with resales of Exchange Notes received in
exchange for Existing Notes where such Existing Notes were acquired as a result
of market-making activities or other trading activities. The Company has agreed
that, for a period of 180 days after the Expiration Date, it will make this
prospectus, as amended or supplemented, available to any broker-dealer for use
in connection with any such resale. In addition, until________, 199 , all
dealers effecting transactions in the Exchange Notes may be required to deliver
a prospectus.*
The Company will not receive any proceeds from any sale of
Exchange Notes by broker-dealers. Exchange Notes received by broker-dealers for
their own account pursuant to the Exchange Offer may be sold from time to time
in one or more transactions in the over-the-counter market, in negotiated
transactions, through the writing of options on the Exchange Notes or a
combination of such methods of resale, at market prices prevailing at the time
of resale, at prices related to such prevailing market prices or negotiated
prices. Any such resale may be made directly to purchasers or to or through
brokers or dealers who may receive compensation in the form of commissions or
concessions from any such broker-dealer or the purchasers of any such Exchange
Notes. Any broker-dealer that resells Exchange Notes that were received by it
for its own account pursuant to the Exchange Offer and any broker or dealer that
participates in a distribution of such Exchange Notes may be deemed to be an
"underwriter" within the meaning of the
- --------
*In addition, the legend required by Item 502(e) of Regulation S-K will appear
on the back cover page of the Exchange Offer prospectus.
<PAGE> 38
Securities Act and any profit on any such resale of Exchange Notes and any
commission or concessions received by any such persons may be deemed to be
underwriting compensation under the Securities Act. The Letter of Transmittal
states that, by acknowledging that it will deliver and by delivering a
prospectus, a broker-dealer will not be deemed to admit that it is an
"underwriter" within the meaning of the Securities Act.
For a period of 180 days after the Expiration Date the Company
will promptly send additional copies of this Prospectus and any amendment or
supplement to this Prospectus to any broker-dealer that requests such documents
in the Letter of Transmittal. The Company has agreed to pay all expenses
incident to the Exchange Offer (including the reasonable expenses of one counsel
for the Holders of the Notes) other than commissions or concessions of any
brokers or dealers and will indemnify the Holders of the Securities (including
any broker-dealers) against certain liabilities, including liabilities under the
Securities Act.
<PAGE> 39
ANNEX D
----
/____/ CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10
ADDITIONAL COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY
AMENDMENTS OR SUPPLEMENTS THERETO.
Name: ____________________________________________
Address: _________________________________________
_________________________________________
If the undersigned is not a broker-dealer, the undersigned represents that it is
not engaged in, and does not intend to engage in, a distribution of Exchange
Notes. If the undersigned is a broker-dealer that will receive Exchange Notes
for its own account in exchange for Notes that were acquired as a result of
market-making activities or other trading activities, it acknowledges that it
will deliver a prospectus in connection with any resale of such Exchange Notes;
however, by so acknowledging and by delivering a prospectus, the undersigned
will not be deemed to admit that it is an "underwriter" within the meaning of
the Securities Act.
<PAGE> 1
Exhibit 10.20
- --------------------------------------------------------------------------------
WARRANT AGREEMENT
Dated as of
January 24, 1997
between
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
and
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as the Warrant Agent
---------------------------------------------
Warrants for
Common Stock of
Electronic Retailing Systems International, Inc.
---------------------------------------------
- --------------------------------------------------------------------------------
<PAGE> 2
TABLE OF CONTENTS
Page
----
ARTICLE 1
Definitions
SECTION 1.01. Definitions............................................ 1
SECTION 1.02. Other Definitions...................................... 4
SECTION 1.03. Rules of Construction.................................. 4
ARTICLE 2
Warrant Certificates
SECTION 2.01. Form and Dating........................................ 5
SECTION 2.02. Legends................................................ 5
SECTION 2.03. Execution and Countersignature......................... 7
SECTION 2.04. Certificate Register................................... 8
SECTION 2.05 Separation of Warrants and
Notes.............................................. 8
SECTION 2.06. Transfer and Exchange.................................. 9
SECTION 2.07. Replacement Certificates............................... 9
SECTION 2.08. Temporary Certificates................................. 10
SECTION 2.09. Cancellation........................................... 10
ARTICLE 3
Exercise Terms
SECTION 3.01. Exercise Price......................................... 11
SECTION 3.02. Exercise Periods....................................... 11
SECTION 3.03. Expiration............................................. 11
SECTION 3.04. Manner of Exercise..................................... 11
SECTION 3.05. Issuance of Warrant Shares............................. 12
SECTION 3.06. Fractional Warrant Shares.............................. 13
SECTION 3.07. Reservation of Warrant Shares.......................... 13
SECTION 3.08. Compliance with Law.................................... 14
<PAGE> 3
2
ARTICLE 4
Antidilution Provisions
SECTION 4.01. Changes in Common Stock................................ 14
SECTION 4.02. Cash Dividends and Other
Distributions........................................ 15
SECTION 4.03. Rights Issue........................................... 16
SECTION 4.04. Issuance of Common Stock or
Rights............................................... 17
SECTION 4.05. Combination; Liquidation............................... 18
SECTION 4.06. Other Events........................................... 19
SECTION 4.07. Superseding Adjustment................................. 19
SECTION 4.08. Minimum Adjustment..................................... 20
SECTION 4.09 Notice of Adjustment................................... 20
SECTION 4.10. Notice of Certain Transactions......................... 21
SECTION 4.11. Adjustment to Warrant
Certificate.......................................... 22
ARTICLE 5
Registration Rights
SECTION 5.01. Effectiveness of Registration
Statements......................................... 22
SECTION 5.02. Suspension............................................. 24
SECTION 5.03. Blue Sky............................................... 25
SECTION 5.04. Accuracy of Disclosure................................. 25
SECTION 5.05. Indemnification ....................................... 26
SECTION 5.06. Additional Acts ....................................... 30
SECTION 5.07. Expenses............................................... 30
ARTICLE 6
Warrant Agent
SECTION 6.01. Appointment of Warrant Agent........................... 31
SECTION 6.02. Rights and Duties of
Warrant Agent........................................ 31
SECTION 6.03. Individual Rights of
Warrant Agent........................................ 32
SECTION 6.04. Warrant Agent's Disclaimer............................. 32
SECTION 6.05. Compensation and Indemnity............................. 33
SECTION 6.06. Successor Warrant Agent................................ 33
<PAGE> 4
3
ARTICLE 7
Miscellaneous
SECTION 7.01. SEC Reports and Other Information...................... 35
SECTION 7.02. Persons Benefitting.................................... 35
SECTION 7.03. Rights of Holders...................................... 36
SECTION 7.04. Amendment.............................................. 36
SECTION 7.05. Notices................................................ 36
SECTION 7.06. Governing Law.......................................... 37
SECTION 7.07. Successors............................................. 37
SECTION 7.08. Multiple Originals..................................... 37
SECTION 7.09. Table of Contents...................................... 38
SECTION 7.10. Severability........................................... 38
EXHIBIT A Form of Face of Warrant Certificate
EXHIBIT B Certificate to be Delivered upon
Exchange or Registration of
Transfer of Warrants
<PAGE> 5
WARRANT AGREEMENT dated as of January 24,
1997 (this "Agreement"), between ELECTRONIC RETAILING
SYSTEMS INTERNATIONAL, INC., a Delaware corporation
(the "Company"), and AMERICAN STOCK TRANSFER & TRUST
COMPANY, as Warrant Agent (the "Warrant Agent").
The Company desires to issue the warrants (the "Warrants")
described herein. The Warrants will initially entitle the holders thereof (the
"Holders") to purchase in the aggregate 2,538,258 shares of common stock, par
value $0.01 per share, of the Company (the "Common Stock") in connection with an
offering by the Company (the "Units Offering") of 147,312 units (the "Units").
Each Unit will consist of (i) 13 1/4% Senior Discount Notes Due 2004 with a
principal amount at maturity of $1,000 (collectively, the "Notes") and (ii) one
Warrant. Each Warrant will entitle the Holder to purchase 17.23 shares of Common
Stock, subject to adjustment as provided herein. In connection with the sale of
the Units, 147,312 Warrants will be issued to the purchasers of the Units.
The Warrants will not trade separately from the Notes until
the commencement of an exchange offer or the effectiveness of a shelf
registration statement for the Notes or such date after February 24, 1997 as
Credit Suisse First Boston Corporation and UBS Securities LLC shall determine
(the "Separation Date").
The Company further desires the Warrant Agent to act on behalf
of the Company in connection with the issuance of the Warrants as provided
herein and the Warrant Agent is willing to so act.
Each party agrees as follows for the benefit of the other
party and for the equal and ratable benefit of the holders of Warrants:
ARTICLE 1
Definitions
SECTION 1.01. Definitions.
"Affiliate" of any Person means (i) any other Person which,
directly or indirectly, is in control of, is
<PAGE> 6
2
controlled by or is under common control with such Person, or (ii) any other
Person who is a director or executive officer (A) of such Person, (B) of any
subsidiary of such Person or (C) of any Person described in clause (i) above.
For purposes hereof, (a) "control" of a Person means the power, direct or
indirect, to direct or cause the direction of the management and policies of
such Person whether by contract or otherwise and (b) beneficial ownership of 5%
or more of the voting common equity (on a fully diluted basis) or warrants to
purchase such equity (whether or not currently exercisable) of a Person shall be
deemed to be in control of such Person; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Board" means the Board of Directors of the Company or any
committee thereof duly authorized to act on behalf of such Board of Directors.
"Business Day" means each day that is not a Saturday, a Sunday
or a day on which banking institutions are not required to be open in the State
of New York.
"Cashless Exercise Ratio" means a fraction, the numerator of
which is the excess of the Current Market Value per share of Common Stock on the
Exercise Date over the Exercise Price per share as of the Exercise Date and the
denominator of which is the Current Market Value per share of the Common Stock
on the Exercise Date.
"Combination" means an event in which the Company consolidates
with, merges with or into, or sells all or substantially all of its assets to
another Person.
"Current Market Value" per share of Common Stock or any other
security at any date means (i) if the security is not registered under the
Exchange Act, (a) the value of the security, determined in good faith by the
Board and certified in a board resolution, based on the most recently completed
arm's-length transaction between the Company and a Person other than an
Affiliate of the Company and the closing of which occurs on such date or shall
have occurred within the six-month period preceding such date, or (b) if no such
transaction shall have occurred on such date or within such six-month period,
the value of the security as determined by an independent financial expert or
(ii) if the security is registered under the Exchange Act, the average of the
daily closing bid prices (or the equivalent in an over-the-counter market) for
each Business Day during the
<PAGE> 7
3
period commencing 15 Business Days before such date and ending on the date one
day prior to such date, or if the security has been registered under the
Exchange Act for less than 15 consecutive Business Days before such date, the
average of the daily closing bid prices (or such equivalent) for all of the
Business Days before such date for which daily closing bid prices are available;
provided, however, that if the closing bid price is not determinable for at
least ten Business Days in such period, the "Current Market Value" of the
security shall be determined as if the security were not registered under the
Exchange Act.
"Exchange Act" means the Securities Exchange Act of 1934, as
amended.
"Exercise Date" means, for a given Warrant, the day on which
such Warrant is exercised pursuant to Section 3.04.
"Indenture" means the Indenture dated as of January 24, 1997,
from the Company to the Trustee, with respect to the Notes, as it may be amended
or supplemented from time to time.
"Issue Date" means the date on which Warrants are initially
issued.
"Officer" means the Chairman of the Board, the President, any
Vice President, the Treasurer, or an Assistant Treasurer, or the Secretary or an
Assistant Secretary of the Company.
"Person" means any individual, corporation, partnership,
joint venture, limited liability company, association, joint-stock company,
trust, unincorporated organization, government or any agency or political
subdivision thereof or any other entity.
"SEC" means the Securities and Exchange Commission, or any
successor agency or body performing substantially similar functions.
"Securities Act" means the Securities Act of 1933, as amended.
"Trustee" means United States Trust Company of New York, any
successor trustee under the Indenture.
<PAGE> 8
4
"Warrant Certificates" mean the registered certificates
(including without limitation, the global certificates) issued by the Company
under this Agreement representing the Warrants.
"Warrant Shares" mean the shares of Common Stock (and any
other securities) for which the Warrants are exercisable.
SECTION 1.02. Other Definitions.
<TABLE>
<CAPTION>
Defined in
Term Section
---- -----------
<S> <C>
"Agreement"...................................... Recitals
"Cashless Exercise".............................. 3.04
"Certificate Register"........................... 2.04
"Common Shelf Registration
Statement"...................................... 5.01
"Common Stock"................................... Recitals
"Company"........................................ Recitals
"Exercise Price"................................. 3.01
"Expiration Date"................................ 3.02(b)
"Holders"........................................ Recitals
"Notes".......................................... Recitals
"Registrar"...................................... 3.07
"Separability Legend"............................ 2.02(b)
"Separation Date"................................ Recitals
"Successor Company".............................. 4.05(a)
"Transfer Agent"................................. 3.05
"Units".......................................... Recitals
"Units Offering"................................. Recitals
"Warrant Agent".................................. Recitals
"Warrants"....................................... Recitals
"Warrant Shelf Registration
Statement"...................................... 5.01
</TABLE>
SECTION 1.03. Rules of Construction. Unless the text otherwise
requires:
(i) a defined term has the meaning assigned to it;
(ii) an accounting term not otherwise defined has the meaning
assigned to it in accordance with generally accepted accounting
principles as in effect from time to time;
(iii) "or" is not exclusive;
<PAGE> 9
5
(iv) "including" means including without limitation; and
(v) words in the singular include the plural and words in the
plural include the singular.
ARTICLE 2
Warrant Certificates
SECTION 2.01. Form and Dating. Each Warrant Certificate shall
be substantially in the form of Exhibit A, which is hereby incorporated in and
expressly made a part of this Agreement. The Warrant Certificates may have
notations, legends or endorsements required by law, stock exchange rule,
agreements to which the Company is subject, if any, or usage (provided that any
such notation, legend or endorsement is in a form acceptable to the Company) and
shall bear the legends required by Section 2.02. Each Warrant Certificate shall
be dated the date of its countersignature. The terms of the Warrant Certificate
set forth in Exhibit A are part of the terms of this Agreement.
SECTION 2.02 Legends. (a) Each Warrant Certificate shall bear
the following legend:
THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE COMPANY
FOR WHICH THIS WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR
SOLD IN THE UNITED STATES ABSENT REGISTRATION UNDER THE
SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES ACT"), AND
ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE
EXEMPTION FROM SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO
HOLDER SHALL BE ENTITLED TO EXERCISE SUCH HOLDER'S WARRANTS AT
ANY TIME UNLESS, AT THE TIME OF EXERCISE, (i) A REGISTRATION
STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF
COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS
BEEN FILED WITH, AND DECLARED EFFECTIVE BY, THE SECURITIES AND
EXCHANGE COMMISSION (THE "SEC"), AND NO STOP ORDER SUSPENDING
THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS BEEN
ISSUED BY THE SEC, OR (ii) THE ISSUANCE OF SUCH SHARES IS
PERMITTED PURSUANT TO AN EXEMPTION FROM THE REGISTRATION
REQUIREMENTS OF THE SECURITIES ACT AND ANY APPLICABLE STATE
SECURITIES LAWS.
<PAGE> 10
6
(b) Each Warrant Certificate issued prior to the Separation
Date shall bear the following legend (the "Separability Legend"):
THE WARRANTS REPRESENTED BY THIS CERTIFICATE WERE INITIALLY
ISSUED AS PART OF AN ISSUANCE OF UNITS, EACH OF WHICH CONSISTS
OF $1,000 PRINCIPAL AMOUNT AT MATURITY OF 13 1/4% % SENIOR
DISCOUNT NOTES DUE 2004 OF ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC. (THE "NOTES") AND ONE WARRANT. PRIOR TO
5:00 P.M., NEW YORK CITY TIME, ON THE DATE OF THE COMMENCEMENT
OF AN EXCHANGE OFFER OR THE EFFECTIVENESS OF A SHELF
REGISTRATION STATEMENT FOR THE NOTES OR SUCH EARLIER DATE
AFTER FEBRUARY 24, 1997 AS CREDIT SUISSE FIRST BOSTON
CORPORATION AND UBS SECURITIES LLC MAY, IN THEIR DISCRETION,
DEEM APPROPRIATE, THE WARRANTS REPRESENTED BY THIS CERTIFICATE
MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY FROM, BUT MAY
BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE NOTES.
(c) Each Warrant Certificate issued prior to the third
anniversary of the original issuance of the Units, unless otherwise agreed by
the Company and the Holder thereof, shall bear the following legend:
"THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A
TRANSACTION EXEMPT FROM REGISTRATION UNDER THE UNITED STATES SECURITIES
ACT OF 1933 (THE "SECURITIES ACT"), AND THIS SECURITY MAY NOT BE
OFFERED, SOLD OR OTHERWISE TRANSFERRED IN THE ABSENCE OF SUCH
REGISTRATION OR AN APPLICABLE EXEMPTION THEREFROM. EACH PURCHASER OF
THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF THIS SECURITY MAY
BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5 OF THE
SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT
(A) THIS SECURITY MAY BE OFFERED, RESOLD, PLEDGED OR OTHERWISE
TRANSFERRED ONLY (I) TO A PERSON WHOM THE SELLER REASONABLY BELIEVES IS
A QIB (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) IN A
TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (II) IN AN OFFSHORE
TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT, (III)
PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
<PAGE> 11
7
PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (IV) TO THE COMPANY OR
(V) PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE
SECURITIES ACT, IN EACH OF CASES (I) THROUGH (V) IN ACCORDANCE WITH ANY
APPLICABLE SECURITIES LAWS OF ANY STATE OF THE UNITED STATES, AND (B)
THE HOLDER WILL, AND EACH SUBSEQUENT HOLDER IS REQUIRED TO, NOTIFY ANY
PURCHASER OF THIS SECURITY FROM IT OF THE RESALE RESTRICTIONS REFERRED
TO IN (A) ABOVE".
BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT IS A
"QUALIFIED INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) OR (B) IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS
DEFINED IN RULE 501(A)(1),(2),(3) OR (7) UNDER THE SECURITIES ACT) OR
(C) IT IS NOT A U.S. PERSON AND IS ACQUIRING THE SECURITY IN AN
OFFSHORE TRANSACTION IN ACCORDANCE WITH REGULATIONS.
(d) Each Warrant Certificate issued in global form and
deposited with DTC shall bear the following legend:
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED
REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"),
NEW YORK, NEW YORK, TO THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER,
EXCHANGE OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF
CEDE & CO. OR SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF
DTC (AND ANY PAYMENT IS MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS
REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER
USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS
THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS IN WHOLE, BUT NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR
THEREOF OR SUCH SUCCESSOR'S NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL
SECURITY SHALL BE LIMITED TO TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS
SET FORTH IN THE WARRANT AGREEMENT REFERRED TO HEREIN.
SECTION 2.03. Execution and Countersignature. Two Officers
shall sign the Warrant Certificates for the Company by manual or facsimile
signature. The Company's seal shall be impressed, affixed, imprinted or
reproduced on the Warrant Certificate and may be in facsimile form. If an
<PAGE> 12
8
Officer whose signature is on a Warrant Certificate no longer holds that office
at the time the Warrant Agent countersigns the Warrant Certificate, the Warrant
Certificate shall nevertheless be valid. A Warrant Certificate shall not be
valid until an authorized signatory of the Warrant Agent manually countersigns
the Warrant Certificate. Such authorized signature shall be conclusive evidence
that the Warrant Certificate has been countersigned under this Agreement.
The Warrant Agent shall initially countersign and deliver
Warrant Certificates entitling the Holders thereof to purchase in the aggregate
not more than 2,538,258 Warrant Shares upon a written order of the Company
signed by two Officers or by an Officer and either an Assistant Treasurer or an
Assistant Secretary of the Company.
The Warrant Agent may appoint an agent reasonably acceptable
to the Company to countersign the Warrant Certificates. Unless limited by the
terms of such appointment, such agent may countersign Warrant Certificates
whenever the Warrant Agent may do so. Each reference in this Agreement to
countersignature by the Warrant Agent includes countersignature by such agent.
Such agent will have the same rights as the Warrant Agent for service of notices
and demands.
SECTION 2.04. Certificate Register. The Warrant Agent shall
keep a register ("Certificate Register") of the Warrant Certificates and of
their transfer and exchange. The Certificate Register shall show the names and
addresses of the respective Holders and the date and number of Warrants
represented on the face of each Warrant Certificate. The Company and the Warrant
Agent may deem and treat the Person in whose name a Warrant Certificate is
registered as the absolute owner of such Warrant Certificate for all purposes
whatsoever and neither the Company nor the Warrant Agent shall be affected by
notice to the contrary.
SECTION 2.05. Separation of Warrants and Notes. (a) Prior to
the Separation Date no Warrant may be sold, assigned or otherwise transferred to
any Person unless, simultaneously with such transfer, the Warrant Agent receives
confirmation from the Trustee for the Notes that the Holder thereof has
requested a transfer of the related Notes to the same transferee.
<PAGE> 13
9
(b) On or after the Separation Date, the holder of a Warrant
Certificate containing a Separability Legend may surrender such Warrant
Certificate accompanied by a written application to the Warrant Agent, duly
executed by the Holder thereof, for a new Warrant Certificate or certificates
not containing the Separability Legend.
SECTION 2.06. Transfer and Exchange. The Warrant Certificates
shall be issued in registered form only and shall be transferable only upon the
surrender of such Warrant Certificate for registration of transfer. When a
Warrant Certificate is presented to the Warrant Agent with a request to register
a transfer, the Warrant Agent shall register the transfer as requested if the
reasonable requirements of the Warrant Agent and of Section 8-401(1) of the
Uniform Commercial Code as in effect in the State of New York are met; provided,
however, that prior to the Separation Date the Warrant Agent shall not register
a transfer of a Warrant Certificate and such transfer will be void and of no
effect unless the Notes that are a part of the same Unit as the Warrants
represented by the Warrant Certificate to be transferred are simultaneously
transferred to the same transferee. To permit the registration of transfers and
exchanges, the Company shall execute and the Warrant Agent shall countersign
Warrant Certificates at the Warrant Agent's request. All Warrant Certificates
issued upon any registration of transfer or exchange of Warrant Certificates
shall be valid obligations of the Company, entitled to the same benefits under
this Agreement as the Warrant Certificates surrendered upon such registration of
transfer or exchange. No service charge will be made to a Holder for any
registration of transfer or exchange upon surrender of any Warrant Certificate
at the office of the Warrant Agent maintained for that purpose. However, the
Company may require payment of a sum sufficient to cover any tax, assessment or
other governmental charge that may be imposed in connection with any
registration of transfer or exchange of Warrant Certificates but not for any
exchange or original issuance (not involving a transfer) pursuant to Section
2.08, 3.04 or 3.05.
SECTION 2.07. Replacement Certificates. If a mutilated Warrant
Certificate is surrendered to the Warrant Agent or if the Holder of a Warrant
Certificate claims that the Warrant Certificate has been lost, destroyed or
wrongfully taken, the Company shall issue and the Warrant Agent shall
countersign a replacement Warrant Certificate if the reasonable requirements of
the Warrant Agent and of
<PAGE> 14
10
Section 8-405 of the Uniform Commercial Code as in effect in the State of New
York are met. If required by the Warrant Agent or the Company, such Holder shall
furnish an indemnity bond sufficient in the judgment of the Company and the
Warrant Agent to protect the Company and the Warrant Agent from any loss which
either of them may suffer if a Warrant Certificate is replaced. The Company and
the Warrant Agent may charge the Holder for their expenses in replacing a
Warrant Certificate. Every replacement Warrant Certificate is an additional
obligation of the Company.
SECTION 2.08. Temporary Certificates. Until definitive Warrant
Certificates are ready for delivery, the Company may prepare and the Warrant
Agent shall countersign temporary Warrant Certificates. Temporary Warrant
Certificates shall be substantially in the form of definitive Warrant
Certificates but may have variations that the Company considers appropriate for
temporary Warrant Certificates. Without unreasonable delay, the Company shall
prepare and the Warrant Agent shall countersign definitive Warrant Certificates
and deliver them in exchange for temporary Warrant Certificates.
SECTION 2.09. Cancellation. (a) In the event the Company shall
purchase or otherwise acquire Warrant Certificates, the same shall thereupon be
delivered to the Warrant Agent for cancellation.
(b) The Warrant Agent and no one else shall cancel and destroy
all Warrant Certificates surrendered for transfer, exchange, replacement,
exercise or cancellation and deliver a certificate of such destruction to the
Company unless the Company directs the Warrant Agent to deliver canceled Warrant
Certificates to the Company. The Company may not issue new Warrant Certificates
to replace Warrant Certificates to the extent they represent Warrants which have
been exercised or Warrants which the Company has purchased or otherwise
acquired.
<PAGE> 15
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ARTICLE 3
Exercise Terms
SECTION 3.01. Exercise Price. Each Warrant shall initially
entitle the Holder thereof, subject to adjustment pursuant to the terms of this
Agreement, to purchase 17.23 shares of Common Stock for a per share exercise
price (the "Exercise Price") of $5.23.
SECTION 3.02. Exercise Periods. (a) Subject to the terms and
conditions set forth herein, the Warrants shall be exercisable at any time or
from time to time on or after January 24, 1998; provided, however, that holders
of Warrants will be able to exercise their Warrants only if (i) the Warrant
Shelf Registration Statement relating to the Warrant Shares is effective, or
(ii) the exercise of such Warrants is exempt from the registration requirements
of the Securities Act, and the Warrant Shares are qualified for sale or exempt
from qualification under the applicable securities laws of the states or other
jurisdictions in which such holders reside.
(b) No Warrant shall be exercisable after February 1, 2004
(the "Expiration Date").
SECTION 3.03. Expiration. Each Warrant shall terminate and
become void as of the earlier of (i) the close of business on the Expiration
Date or (ii) the date such Warrant is exercised. The Company shall give notice
not less than 90 and not more than 120 days prior to the Expiration Date to the
Holders of all then outstanding Warrants to the effect that the Warrants will
terminate and become void as of the close of business on the Expiration Date;
provided, however, that if the Company fails to give notice as provided in this
Section 3.03, the Warrants will nevertheless expire and become void on the
Expiration Date.
SECTION 3.04. Manner of Exercise. Warrants may be exercised
upon (i) surrender to the Warrant Agent at the office of the Warrant Agent of
the related Warrant Certificate, together with the form of election to purchase
Common Stock on the reverse thereof duly filled in and signed by the Holder
thereof, and (ii) payment to the Warrant Agent, for the account of the Company,
of the Exercise Price for each Warrant Share issuable upon the exercise of such
Warrants then exercised. Such payment shall be made (i) in cash or by certified
or official bank
<PAGE> 16
12
check payable to the order of the Company or by wire transfer of funds to an
account designated by the Company for such purpose or (ii) without the payment
of cash, by reducing the number of shares of Common Stock obtainable upon the
exercise of a Warrant and payment of the Exercise Price in cash so as to yield a
number of shares of Common Stock upon the exercise of such Warrant equal to the
product of (a) the number of shares of Common Stock issuable as of the Exercise
Date upon the exercise of such Warrant (if payment of the Exercise Price were
being made in cash) and (b) the Cashless Exercise Ratio. An exercise of a
Warrant in accordance with the immediately preceding sentence is herein called a
"Cashless Exercise". Upon surrender of a Warrant Certificate representing more
than one Warrant in connection with the holder's option to elect a Cashless
Exercise, the number of shares of Common Stock deliverable upon a Cashless
Exercise shall be equal to the number of shares of Common Stock issuable upon
the exercise of Warrants that the holder specifies are to be exercised pursuant
to a Cashless Exercise multiplied by the Cashless Exercise Ratio. All provisions
of this Agreement shall be applicable with respect to a surrender of a Warrant
Certificate pursuant to a Cashless Exercise for less than the full number of
Warrants represented thereby. Subject to Section 3.02, the rights represented by
the Warrants shall be exercisable at the election of the Holders thereof either
in full at any time or from time to time in part and in the event that a Warrant
Certificate is surrendered for exercise of less than all the Warrants
represented by such Warrant Certificate at any time prior to the Expiration
Date, a new Warrant Certificate representing the remaining Warrants shall be
issued. The Warrant Agent shall countersign and deliver the required new Warrant
Certificates, and the Company, at the Warrant Agent's request, shall supply the
Warrant Agent with Warrant Certificates duly signed on behalf of the Company for
such purpose.
SECTION 3.05. Issuance of Warrant Shares. Subject to Section
2.07, upon the surrender of Warrant Certificates and payment of the per share
Exercise Price, as set forth in Section 3.04, the Company shall issue and cause
the Warrant Agent or, if appointed, a transfer agent for the Common Stock
("Transfer Agent") to countersign and deliver to or upon the written order of
the Holder and in such name or names as the Holder may designate a certificate
or certificates for the number of full Warrant Shares so purchased upon the
exercise of such Warrants or other securities or property to which it is
entitled, registered
<PAGE> 17
13
or otherwise, to the Person or Persons entitled to receive the same, together
with cash as provided in Section 3.06 in respect of any fractional Warrant
Shares otherwise issuable upon such exercise. Such certificate or certificates
shall be deemed to have been issued and any Person so designated to be named
therein shall be deemed to have become a holder of record of such Warrant Shares
as of the date of the surrender of such Warrant Certificates and payment of the
per share Exercise Price, as aforesaid; provided, however, that if, at such
date, the transfer books for the Warrant Shares shall be closed, the
certificates for the Warrant Shares in respect of which such Warrants are then
exercised shall be issuable as of the date on which such books shall next be
opened and until such date the Company shall be under no duty to deliver any
certificates for such Warrant Shares; provided further, however, that such
transfer books, unless otherwise required by law, shall not be closed at any one
time for a period longer than 20 calendar days.
SECTION 3.06. Fractional Warrant Shares. The Company shall not
be required to issue fractional Warrant Shares on the exercise of Warrants. If
more than one Warrant shall be exercised in full at the same time by the same
Holder, the number of full Warrant Shares which shall be issuable upon such
exercise shall be computed on the basis of the aggregate number of Warrant
Shares purchasable pursuant thereto. If any fraction of a Warrant Share would,
except for the provisions of this Section 3.06, be issuable on the exercise of
any Warrant (or specified portion thereof), the Company shall pay an amount in
cash equal to the Current Market Value per Warrant Share, as determined on the
day immediately preceding the date the Warrant is exercised, multiplied by such
fraction, computed to the nearest whole cent.
SECTION 3.07. Reservation of Warrant Shares. The Company shall
at all times keep reserved out of its authorized shares of Common Stock a number
of shares of Common Stock sufficient to provide for the exercise of all
outstanding Warrants. The registrar for the Common Stock (the "Registrar") shall
at all times until the Expiration Date reserve such number of authorized shares
as shall be required for such purpose. The Company will keep a copy of this
Agreement on file with the Transfer Agent. All Warrant Shares which may be
issued upon exercise of Warrants shall, upon issue, be fully paid,
nonassessable, free of preemptive rights and free from all taxes, liens, charges
and security interests with respect to the issue thereof. The Company
<PAGE> 18
14
will supply such Transfer Agent with duly executed stock certificates for such
purpose and will itself provide or otherwise make available any cash which may
be payable as provided in Section 3.06. The Company will furnish to such
Transfer Agent a copy of all notices of adjustments (and certificates related
thereto) transmitted to each Holder.
Before taking any action which would cause an adjustment
pursuant to Article 4 to reduce the Exercise Price below the then par value (if
any) of the Common Stock, the Company shall take any and all corporate action
which may, in the opinion of its counsel, be necessary in order that the Company
may validly and legally issue fully paid and nonassessable shares of Common
Stock at the Exercise Price as so adjusted.
The Company covenants that all shares of Common Stock which
may be issued upon exercise of Warrants will, upon issue, be fully paid,
nonassessable, free of preemptive rights, free from all taxes and free from all
liens, charges and security interests, created by or through the Company, with
respect to the issue thereof.
SECTION 3.08. Compliance with Law. Notwithstanding anything in
this Agreement to the contrary, in no event shall a Holder be entitled to
exercise a Warrant unless (i) a registration statement filed under the
Securities Act in respect of the issuance of the Warrant Shares is then
effective or (ii) in the opinion of counsel to the Company addressed to the
Warrant Agent the exercise of such Warrants is exempt from the registration
requirements of the Securities Act and such securities are qualified for sale or
exempt from qualification under the applicable securities laws of the States or
other jurisdictions in which such holders reside.
ARTICLE 4
Antidilution Provisions
SECTION 4.01. Changes in Common Stock. In the event that at
any time or from time to time the Company shall (i) pay a dividend or make a
distribution on its Common Stock in shares of its Common Stock or other shares
of its capital stock, (ii) subdivide its outstanding shares of Common Stock into
a larger number of shares of Common Stock, (iii) combine its outstanding shares
of Common Stock
<PAGE> 19
15
into a smaller number of shares of Common Stock or (iv) increase or decrease the
number of shares of Common Stock outstanding by reclassification of its Common
Stock, then the number of shares of Common Stock issuable upon exercise of each
Warrant immediately after the happening of such event shall be adjusted to a
number determined by multiplying the number of shares of Common Stock that such
holder would have owned or have been entitled to receive upon exercise had such
Warrants been exercised immediately prior to the happening of the events
described above (or, in the case of a dividend or distribution of Common Stock
or other shares of capital stock, immediately prior to the record date therefor)
by a fraction, the numerator of which shall be the total number of shares of
Common Stock outstanding immediately after the happening of the events described
above and the denominator of which shall be the total number of shares of Common
Stock outstanding immediately prior to the happening of the events described
above; and subject to Section 4.08 the Exercise Price for each Warrant shall be
adjusted to a number determined by dividing the Exercise Price immediately prior
to such event by such fraction. An adjustment made pursuant to this Section 4.01
shall become effective immediately after the effective date of such event,
retroactive to the record date therefor in the case of a dividend or
distribution in shares of Common Stock or other shares of the Company's capital
stock.
SECTION 4.02. Cash Dividends and Other Distributions. In the
event that at any time or from time to time the Company shall distribute to all
holders of Common Stock (i) any dividend or other distribution of cash,
evidences of its indebtedness, shares of its capital stock or any other
properties or securities or (ii) any options, warrants or other rights to
subscribe for or purchase any of the foregoing (other than, in each case, (w)
the issuance of any rights under a shareholder rights plan, (x) any dividend or
distribution described in Section 4.01, (y) any rights, options, warrants or
securities described in Section 4.03 and (z) any cash dividends or other cash
distributions from current or retained earnings), then the number of shares of
Common Stock issuable upon the exercise of each Warrant shall be increased to a
number determined by multiplying the number of shares of Common Stock issuable
upon the exercise of such Warrant immediately prior to the record date for any
such dividend or distribution by a fraction, the numerator of which shall be the
Current Market Value per share of Common Stock on the record date for such
dividend or
<PAGE> 20
16
distribution and the denominator of which shall be such Current Market Value per
share of Common Stock on the record date for such dividend or distribution less
the sum of (x) the amount of cash, if any, distributed per share of Common Stock
and (y) the fair value (as determined in good faith by the Board, whose
determination shall be evidenced by a board resolution filed with the Warrant
Agent, a copy of which will be sent to Holders upon request) of the portion, if
any, of the distribution applicable to one share of Common Stock consisting of
evidences of indebtedness, shares of stock, securities, other property,
warrants, options or subscription or purchase rights; and subject to Section
4.08 the Exercise Price shall be adjusted to a number determined by dividing the
Exercise Price immediately prior to such record date by the above fraction. Such
adjustments shall be made whenever any distribution is made and shall become
effective as of the date of distribution, retroactive to the record date for any
such distribution. No adjustment shall be made pursuant to this Section 4.02
which shall have the effect of decreasing the number of shares of Common Stock
issuable upon exercise of each Warrant or increasing the Exercise Price.
SECTION 4.03. Rights Issue. In the event that at any time or
from time to time the Company shall issue rights, options or warrants entitling
the holders thereof to subscribe for shares of Common Stock, or securities
convertible into or exchangeable or exercisable for Common Stock to all holders
of Common Stock without any charge, entitling such holders to subscribe for or
purchase shares of Common Stock at a price per share that is lower at the record
date for such issuance than the then Current Market Value per share of Common
Stock other than in connection with the adoption of a shareholder rights plan by
the Company, the number of shares of Common Stock issuable upon the exercise of
each Warrant shall be increased to a number determined by multiplying the number
of shares of Common Stock theretofore issuable upon exercise of each Warrant by
a fraction, the numerator of which shall be the number of shares of Common Stock
outstanding on the date of issuance of such rights, options, warrants or
securities plus the number of additional shares of Common Stock offered for
subscription or purchase or into or for which such securities that are issued
are convertible, exchangeable or exercisable, and the denominator of which shall
be the number of shares of Common Stock outstanding on the date of issuance of
such rights, options, warrants or securities plus the total number of shares of
Common Stock which the
<PAGE> 21
17
aggregate consideration expected to be received by the Company (assuming the
exercise or conversion of all such rights, options, warrants or securities)
would purchase at the then Current Market Value per share of Common Stock.
Subject to Section 4.08, in the event of any such adjustment, the Exercise Price
shall be adjusted to a number determined by dividing the Exercise Price
immediately prior to such date of issuance by the aforementioned fraction. Such
adjustment shall be made immediately after such rights, options or warrants are
issued and shall become effective, retroactive to the record date for the
determination of stockholders entitled to receive such rights, options, warrants
or securities. No adjustment shall be made pursuant to this Section 4.03 which
shall have the effect of decreasing the number of shares of Common Stock
purchasable upon exercise of each Warrant or of increasing the Exercise Price.
SECTION 4.04 Issuance of Common Stock or Rights. In the event
that at any time or from time to time the Company shall issue (i) shares of
Common Stock (subject to the provisions below), (ii) rights, options or warrants
entitling the holders thereof to subscribe for shares of Common Stock (provided,
however that no adjustment shall be made upon the exercise of such rights,
options or warrants), or (iii) securities convertible into or exchangeable or
exercisable for Common Stock (provided, however, that no adjustment shall be
made upon the conversion, exchange or exercise of such securities (other than
issuances specified in (i), (ii) or (iii) which are made as the result of
anti-dilution adjustments in such securities)), at a price per share at the
record date of such issuance that is less than the then Current Market Value per
share of Common Stock, the number of shares of Common Stock issuable upon the
exercise of each Warrant shall be increased to a number determined by
multiplying the number of shares of Common Stock theretofore issuable upon
exercise of each Warrant by a fraction, the numerator of which shall be the
number of shares of Common Stock outstanding immediately after such sale or
issuance plus the number of additional shares of Common Stock offered for
subscription or purchase or into or for which such securities that are issued
are convertible, exchangeable or exercisable, and the denominator of which shall
be the number of shares of Common Stock outstanding immediately prior to such
sale or issuance plus the total number of shares of Common Stock which the
aggregate consideration expected to be received by the Company (assuming the
exercise or conversion of all such rights, options, warrants
<PAGE> 22
18
or securities, if any) would purchase at the then Current Market Value per share
of Common Stock; and subject to Section 4.08 the Exercise Price shall be
adjusted to a number determined by dividing the Exercise Price immediately prior
to such date of issuance by the aforementioned fraction; provided, however, that
no adjustment to the number of Warrant Shares issuable upon the exercise of the
Warrants or to the Exercise Price shall be made as a result of (i) the issuance
of shares of Common Stock under any warrants, options or other rights existing
on the date hereof, (ii) the issuance of shares of Common Stock in bona fide
public offerings that are underwritten or in which a placement agent is retained
by the Company, (iii) the issuance of options, or shares of Common Stock
pursuant to any option, under any employee benefit plans approved by the Board
of Directors or (iv) the issuance of shares of Common Stock in connection with
acquisitions of products, technologies and businesses other than to Affiliates
of the Company. Such adjustments shall be made whenever such rights, options or
warrants or convertible securities are issued. No adjustment shall be made
pursuant to this Section 4.04 which shall have the effect of decreasing the
number of shares of Common Stock issuable upon exercise of each warrant or of
increasing the Exercise Price.
SECTION 4.05. Combination; Liquidation. (a) Except as provided
in Section 4.05(b), in the event of a Combination, each Holder shall have the
right to receive upon exercise of the Warrants the kind and amount of shares of
capital stock or other securities or property which such Holder would have been
entitled to receive upon or as a result of such Combination had such Warrant
been exercised immediately prior to such event. Unless paragraph (b) is
applicable to a Combination, the Company shall provide that the surviving or
acquiring Person (the "Successor Company") in such Combination will enter into
an agreement with the Warrant Agent confirming the Holders' rights pursuant to
this Section 4.05(a) and providing for adjustments, which shall be as nearly
equivalent as may be practicable to the adjustments provided for in this Article
4. The provisions of this Section 4.05(a) shall similarly apply to successive
Combinations involving any Successor Company.
(b) In the event of (i) a Combination where consideration to
the holders of Common Stock in exchange for their shares is payable solely in
cash or (ii) the dissolution, liquidation or winding-up of the Company, the
holders of the Warrants shall be entitled to receive, upon
<PAGE> 23
19
surrender of their Warrant Certificates, distributions on an equal basis with
the holders of Common Stock or other securities issuable upon exercise of the
Warrants, as if the Warrants had been exercised immediately prior to such event,
less the Exercise Price.
In case of any Combination described in this Section 4.05(b),
the surviving or acquiring Person and, in the event of any dissolution,
liquidation or winding-up of the Company, the Company, shall deposit promptly
with the Warrant Agent the funds, if any, necessary to pay to the holders of the
Warrants the amounts to which they are entitled as described above. After such
funds and the surrendered Warrant Certificates are received, the Warrant Agent
is required to deliver a check in such amount as is appropriate (or, in the case
of consideration other than cash, such other consideration as is appropriate) to
such Person or Persons as it may be directed in writing by the Holders
surrendering such Warrants.
SECTION 4.06. Other Events. If any event occurs as to which
the foregoing provisions of this Article 4 are not strictly applicable or, if
strictly applicable, would not, in the good faith judgment of the Board, fairly
and adequately protect the purchase rights of the Warrants in accordance with
the essential intent and principles of such provisions, then such Board shall
make such adjustments in the application of such provisions, in accordance with
such essential intent and principles, as shall be reasonably necessary, in the
good faith opinion of such Board, to protect such purchase rights as aforesaid,
but in no event shall any such adjustment have the effect of increasing the
Exercise Price or decreasing the number of shares of Common Stock issuable upon
exercise of any Warrant.
SECTION 4.07. Superseding Adjustment. Upon the expiration of
any rights, options, warrants or conversion or exchange privileges which
resulted in adjustments pursuant to this Article 4, if any thereof shall not
have been exercised, the number of Warrant Shares issuable upon the exercise of
each Warrant shall be readjusted pursuant to the applicable section of Article 4
as if (A) the only shares of Common Stock issuable upon exercise of such rights,
options, warrants, conversion or exchange privileges were the shares of Common
Stock, if any, actually issued upon the exercise of such rights, options,
warrants or conversion or exchange privileges and (B) shares of Common Stock
actually issued, if any, were issuable for the consideration actually
<PAGE> 24
20
received by the Company upon such exercise plus the aggregate consideration, if
any, actually received by the Company for the issuance, sale or grant of all
such rights, options, warrants or conversion or exchange privileges whether or
not exercised and the Exercise Price shall be readjusted inversely; provided,
however, that no such readjustment shall (except by reason of an intervening
adjustment under Section 4.01) have the effect of decreasing the number of
Warrant Shares purchasable upon the exercise of each Warrant or increase the
Exercise Price by an amount in excess of the amount of the adjustment initially
made in respect of the issuance, sale or grant of such rights, options, warrants
or conversion or exchange privileges.
SECTION 4.08. Minimum Adjustment. The adjustments required by
the preceding Sections of this Article 4 shall be made whenever and as often as
any specified event requiring an adjustment shall occur, except that no
adjustment of the Exercise Price or the number of shares of Common Stock
issuable upon exercise of Warrants that would otherwise be required shall be
made unless and until such adjustment either by itself or with other adjustments
not previously made increases or decreases by at least 1% the Exercise Price or
the number of shares of Common Stock issuable upon exercise of Warrants
immediately prior to the making of such adjustment. Any adjustment representing
a change of less than such minimum amount shall be carried forward and made as
soon as such adjustment, together with other adjustments required by this
Article 4 and not previously made, would result in a minimum adjustment. For the
purpose of any adjustment, any specified event shall be deemed to have occurred
at the close of business on the date of its occurrence. In computing adjustments
under this Article 4, fractional interests in Common Stock shall be taken into
account to the nearest one-hundredth of a share.
SECTION 4.09. Notice of Adjustment. Whenever the Exercise
Price or the number of shares of Common Stock and other property, if any,
issuable upon exercise of the Warrants is adjusted, as herein provided, the
Company shall deliver to the Warrant Agent a certificate of a firm of
independent accountants selected by the Board (who may be the regular
accountants employed by the Company) setting forth, in reasonable detail, the
event requiring the adjustment and the method by which such adjustment was
calculated (including a description of the basis on which (i) the Board
determined the fair value of any evidences of indebtedness, other securities or
property or warrants,
<PAGE> 25
21
options or other subscription or purchase rights and (ii) the Current Market
Value of the Common Stock was determined, if either of such determinations were
required), and specifying the Exercise Price and the number of shares of Common
Stock issuable upon exercise of Warrants after giving effect to such adjustment.
The Company shall promptly cause the Warrant Agent to mail a copy of such
certificate to each Holder in accordance with Section 7.06. The Warrant Agent
shall be entitled to rely on such certificate and shall be under no duty or
responsibility with respect to any such certificate, except to exhibit the same
from time to time, to any Holder desiring an inspection thereof during
reasonable business hours. The Warrant Agent shall not at any time be under any
duty or responsibility to any Holder to determine whether any facts exist which
may require any adjustment of the Exercise Price or the number of shares of
Common Stock or other stock or property issuable on exercise of the Warrants, or
with respect to the nature or extent of any such adjustment when made, or with
respect to the method employed in making such adjustment or the validity or
value of any shares of Common Stock, evidences of indebtedness, warrants,
options, or other securities or property.
SECTION 4.10. Notice of Certain Transactions. In the event
that the Company shall propose to (a) pay any dividend payable in securities of
any class to the holders of its Common Stock or to make any other non-cash
dividend or distribution to the holders of its Common Stock, (b) offer the
holders of its Common Stock rights to subscribe for or to purchase any
securities convertible into shares of Common Stock or shares of stock of any
class or any other securities, rights or options, (c) issue any (i) shares of
Common Stock, (ii) rights, options or warrants entitling the holders thereof to
subscribe for shares of Common Stock, or (iii) securities convertible into or
exchangeable or exercisable for Common Stock (in the case of (i), (ii) and
(iii), if such issuance or adjustment would result in an adjustment hereunder),
(d) effect any capital reorganization, reclassification, consolidation or
merger, (e) effect the voluntary or involuntary dissolution, liquidation or
winding-up of the Company or (f) make a tender offer or exchange offer with
respect to the Common Stock, the Company shall within 5 days send to the Warrant
Agent and the Warrant Agent shall within 5 days send the Holders a notice (in
such form as shall be furnished to the Warrant Agent by the Company) of such
proposed action or offer. Such notice shall be mailed by the Warrant Agent to
<PAGE> 26
22
the Holders at their addresses as they appear in the Certificate Register, which
shall specify the record date for the purposes of such dividend, distribution or
rights, or the date such issuance or event is to take place and the date of
participation therein by the holders of Common Stock, if any such date is to be
fixed, and shall briefly indicate the effect of such action on the Common Stock
and on the number and kind of any other shares of stock and on other property,
if any, and the number of shares of Common Stock and other property, if any,
issuable upon exercise of each Warrant and the Exercise Price after giving
effect to any adjustment pursuant to Article 4 which will be required as a
result of such action. Such notice shall be given as promptly as possible and
(x) in the case of any action covered by clause (a) or (b) above, at least 10
days prior to the record date for determining holders of the Common Stock for
purposes of such action or (y) in the case of any other such action, at least 20
days prior to the date of the taking of such proposed action or the date of
participation therein by the holders of Common Stock, whichever shall be the
earlier.
SECTION 4.11. Adjustment to Warrant Certificate. The form of
Warrant Certificate need not be changed because of any adjustment made pursuant
to this Article 4, and Warrant Certificates issued after such adjustment may
state the same Exercise Price and the same number of shares of Common Stock
issuable upon exercise of the Warrants as are stated in the Warrant Certificates
initially issued pursuant to this Agreement. The Company, however, may at any
time in its sole discretion make any change in the form of Warrant Certificate
that it may deem appropriate to give effect to such adjustments and that does
not affect the substance of the Warrant Certificate, and any Warrant Certificate
thereafter issued or countersigned, whether in exchange or substitution for an
outstanding Warrant Certificate or otherwise, may be in the form as so changed.
ARTICLE 5
Registration Rights
SECTION 5.01. Effectiveness of Registration Statement. Subject
to Section 5.02, the Company shall cause to be filed pursuant to Rule 415 (or
any successor provision) of the Securities Act not later than 45 days after the
Issue Date, a shelf registration statement
<PAGE> 27
23
relating to the offer and sale of the Warrants by the Holders from time to time
in accordance with the methods of distribution elected by such holders and set
forth in such registration statement (the "Warrant Shelf Registration
Statement"), and shall use its reasonable best efforts to cause the Warrant
Shelf Registration Statement to be declared effective on or before 150 days
after the Issue Date and a shelf registration statement covering the issuance of
Warrant Shares to the Holders upon exercise of the Warrants by the Holders
thereof (the "Common Shelf Registration Statement", and together with the
Warrant Shelf Registration Statement, the "Registration Statements") and shall
use its reasonable best efforts to cause the Common Shelf Registration Statement
to be declared effective on or before 365 days after the Issue Date, and to
cause each of the Registration Statements to remain effective until the earliest
of (i) such time as all Warrants have been sold or exercised, as the case may
be, (ii) the Expiration Date and (iii) in the case of the Warrant Shelf
Registration Statement, until all Warrants can be sold without restriction under
the Securities Act. In connection with any Registration Statement, (i) the
Company shall furnish to the Warrant Agent, prior to the filing with the
Commission, a copy of any Registration Statement, and each amendment thereof and
each amendment or supplement, if any, to the prospectus included therein and
shall use its reasonable best efforts to reflect in each such document, when
filed with the Commission, such comments as the Warrant Agent may reasonably
propose, (ii) the Company shall furnish to each Holder, without charge, at least
one copy of any Registration Statement and any post-effective amendment thereto,
including financial statements and schedules, and, if the Holder so requests in
writing, all exhibits thereto (including those incorporated by reference), (iii)
the Company shall, for so long as any Registration Statement is effective,
deliver to each Holder, without charge, as many copies of the prospectus
(including each preliminary prospectus) included in such Registration Statement
and any amendment or supplement thereto as such Holder may reasonably request,
and the Company consents to the proper use of the prospectus therein and any
amendment or supplement thereto by each of the selling Holders in connection
with the offering and sale of the Warrants or the Warrant Shares, as the case
may be, covered by such prospectus and any amendment or supplement thereto, (iv)
the Company may require each Holder of Warrants to be sold pursuant to the
Warrant Shelf Registration Statement or to be exercised in connection with the
Common Shelf
<PAGE> 28
24
Registration Statement to furnish to the Company such information regarding the
Holder and the distribution of such Warrants or Warrant Shares as the Company
may from time to time reasonably request for inclusion in such Registration
Statement, (v) the Company shall, if requested, promptly incorporate in a
prospectus supplement or post-effective amendment to such Registration Statement
such information as a majority in interest of the Holders reasonably agree
should be included therein and shall make all required filings of such
prospectus supplement or post-effective amendment as soon as notified of the
matters to be incorporated in such prospectus supplement or post-effective
amendment, (vi) the Company shall enter into such agreements (including
underwriting agreements) as are appropriate, customary and reasonably necessary
in connection with any such Registration Statement and (vii) the Company shall
(A) make available all material customary for reasonable due diligence
examinations in connection with such Registration Statements, (B) make such
representations and warranties to the Holders of Warrants and the underwriters,
if any, as are customary and reasonable in connection with such Registration
Statements, (C) obtain such opinions of counsel to the Company addressed to and
reasonably satisfactory to the Holders as are customary and reasonable in
connection with such Registration Statements and (D) obtain such "comfort"
letters and updates thereof from the independent certified public accountants of
the Company addressed to the Holders as are customary and reasonable in
connection with such Registration Statements. The Company will furnish the
Warrant Agent with current prospectuses meeting the requirements of the
Securities Act in sufficient quantity to permit the Warrant Agent to deliver, at
the Company's expense, a prospectus to each holder of a Warrant upon the
exercise thereof. The Company shall promptly inform the Warrant Agent of any
change in the status of the effectiveness or availability of any Registration
Statement.
SECTION 5.02. Suspension. During any consecutive 365-day
period, the Company shall be entitled to suspend the availability of each of the
Warrant Shelf Registration Statement and the Common Shelf Registration Statement
for up to two 45 consecutive-day periods (except during the 45 consecutive-day
period immediately prior to the Expiration Date) if the Company's Board
determines in the exercise of its reasonable judgement that there is a valid
business purpose for such suspension and provides notice that such determination
was made by the Company's board to the holders of the Warrants; provided,
however, that in no event shall
<PAGE> 29
25
the Company be required to disclose the business purpose for such suspension if
the Company determines in good faith that such business purpose must remain
confidential.
SECTION 5.03. Blue Sky. The Company shall use its reasonable
best efforts to register or qualify the Warrants and the Warrant Shares under
all applicable securities laws, blue sky laws or similar laws of all
jurisdictions in the United States and Canada in which any holder of Warrants
may or may be deemed to purchase Warrants or Warrant Shares upon the exercise of
Warrants and shall use its reasonable best efforts to maintain such registration
or qualification through the earliest of (i) such time as all Warrants have been
exercised, (ii) the Expiration Date and (iii) in the case of the Warrant Shelf
Registration Statement, until all Warrants can be sold without restriction under
the Securities Act; provided, however, that the Company shall not be required to
qualify generally to do business in any jurisdiction where it would not
otherwise be required to qualify but for this Section 5.03 or to take any action
which would subject it to general service of process or to taxation in any such
jurisdiction where it is not then so subject.
SECTION 5.04. Accuracy of Disclosure. The Company represents
and warrants to each Holder and agrees for the benefit of each Holder that (i)
each of the Warrant Shelf Registration Statement and the Common Shelf
Registration Statement and any amendment thereto will not contain any untrue
statement of a material fact or omit to state a material fact required to be
stated therein or necessary to make the statements contained therein not
misleading; and (ii) each of the prospectus furnished to such Holder for
delivery in connection with the sale of Warrants and the prospectus delivered to
such Holder upon the exercise of Warrants and the documents incorporated by
reference therein will not contain any untrue statement of a material fact or
omit to state a material fact required to be stated therein or necessary to make
the statements contained therein, in light of the circumstances under which they
were made, not misleading; provided, however, that the Company shall have no
liability under clauses (i) or (ii) of this Section 5.04 with respect to any
such untrue statement or omission made in any Registration Statement in reliance
upon and in conformity with information furnished to the Company by or on behalf
of the Holders specifically for inclusion therein.
<PAGE> 30
26
SECTION 5.05. Indemnification. (a) In connection with any
Registration Statement, the Company agrees to indemnify and hold harmless each
Holder of the Warrants and each person, if any, who controls such Holder within
the meaning of the Securities Act or the Exchange Act (each Holder and such
controlling persons being referred to collectively as the "Indemnified Parties")
from and against any losses, claims, damages or liabilities, joint or several,
or any actions in respect thereof (including but not limited to any losses,
claims, damages, liabilities or actions relating to purchases and sales of the
Warrants or the Warrant Shares) to which each Indemnified Party may become
subject under the Securities Act, the Exchange Act or otherwise, insofar as such
losses, claims, damages, liabilities or actions arise out of or are based upon
any untrue statement or alleged untrue statement of a material fact contained in
such Registration Statement or prospectus or in any amendment or supplement
thereto, or arise out of, or are based upon, the omission or alleged omission to
state therein a material fact required to be stated therein or necessary to make
the statements therein, in light of the circumstances under which they were
made, not misleading, and shall reimburse, as incurred, the Indemnified Parties
for any legal or other expenses reasonably incurred by them in connection with
investigating or defending any such loss, claim, damage, liability or action in
respect thereof; provided, however, that (i) the Company shall not be liable in
any such case to the extent that such loss, claim, damage or liability arises
out of or is based upon any untrue statement or alleged untrue statement or
omission or alleged omission made in such Registration Statement or any
preliminary or final prospectus or in any amendment or supplement thereto in
reliance upon and in conformity with written information pertaining to such
Holder and furnished to the Company by or on behalf of such Holder specifically
for inclusion therein, (ii) with respect to any untrue statement or omission or
alleged untrue statement or omission made in any prospectus relating to such
Registration Statement, the indemnity agreement contained in this subsection (a)
shall not inure to the benefit of any person as to which there is a prospectus
delivery requirement (a "Delivering Seller") that sold the Securities to the
person asserting any such losses, claims, damages or liabilities to the extent
that any such loss, claim, damage or liability of such Delivering Seller results
from the fact that there was not sent or given to such person, on or prior to
the written confirmation of such sale, a copy of the relevant prospectus, as
amended and supplemented, provided
<PAGE> 31
27
that (I) the Company shall have previously furnished copies thereof to such
Delivering Seller in accordance with this Agreement and (II) such furnished
prospectus, as amended and supplemented, would have corrected any such untrue
statement or omission or alleged untrue statement or omission, and (iii) this
indemnity agreement will be in addition to any liability which the Company may
otherwise have to such Indemnified Party. The Company shall also indemnify
underwriters, selling brokers, dealer-managers and similar securities industry
professionals participating in the distribution (in each case as described in
such Registration Statement), their officers and directors and each person who
controls such persons within the meaning of the Securities Act or the Exchange
Act to the same extent as provided above with respect to the indemnification of
the Holders of the Securities if requested by such Holders.
(b) In connection with any Registration Statement, each Holder
of the Warrants, severally and not jointly, will indemnify and hold harmless the
Company and each person, if any, who controls the Company within the meaning of
the Securities Act or the Exchange Act from and against any losses, claims,
damages or liabilities or any actions in respect thereof to which the Company or
any such controlling person may become subject under the Securities Act, the
Exchange Act or otherwise, insofar as such losses, claims, damages, liabilities
or actions arise out of or are based upon any untrue statement or alleged untrue
statement of a material fact contained in such Registration Statement or
preliminary or final prospectus or in any amendment or supplement thereto, or
arise out of or are based upon the omission or alleged omission to state therein
a material fact necessary to make the statements therein, in light of the
circumstances under which they were made, not misleading, but in each case only
to the extent that the untrue statement or alleged untrue statement or omission
or alleged omission was made in reliance upon and in conformity with written
information pertaining to such Holder and furnished to the Company by or on
behalf of such Holder specifically for inclusion therein; and, subject to the
limitation set forth immediately preceding this clause, shall reimburse, as
incurred, the Company for any legal or other expenses reasonably incurred by the
Company or any such controlling person in connection with investigating or
defending any loss, claim, damage, liability or action in respect thereof. This
indemnity agreement will be in addition to any liability which such Holder may
otherwise have to the Company or any of its controlling persons.
<PAGE> 32
28
(c) Promptly after receipt by an indemnified party under this
section of notice of the commencement of any action or proceeding (including a
governmental investigation), such indemnified party will, if a claim in respect
thereof is to be made against the indemnifying party under this section, notify
the indemnifying party of the commencement thereof; but the omission so to
notify the indemnifying party will not, in any event, relieve the indemnifying
party from any obligations to any indemnified party other than the
indemnification obligation provided in paragraph (a) or (b) above, except to the
extent that it is prejudiced or harmed in any material respect by failure to
give such prompt notice. In case any such action is brought against any
indemnified party, and it notifies the indemnifying party of the commencement
thereof, the indemnifying party will be entitled to participate therein and, to
the extent that it may wish, jointly with any other indemnifying party similarly
notified, to assume the defense thereof, with one counsel (and local counsel as
necessary) reasonably satisfactory to such indemnified party (who shall not,
except with the consent of the indemnified party, be counsel to the indemnifying
party), and after notice from the indemnifying party to such indemnified party
of its election so to assume the defense thereof the indemnifying party will not
be liable to such indemnified party under this section for any legal or other
expenses, other than reasonable costs of investigation, subsequently incurred by
such indemnified party in connection with the defense thereof. No indemnifying
party shall, without the prior written consent of the indemnified party, not to
be unreasonably withheld, effect any settlement of any pending or threatened
action in respect of which any indemnified party is or could have been a party
and indemnity could have been sought hereunder by such indemnified party unless
such settlement includes an unconditional release of such indemnified party from
all liability on any claims that are the subject matter of such action. No
indemnifying party shall be liable for any amounts paid in settlement of any
action or claim without its written consent, which consent shall not be
unreasonably withheld.
(d) If the indemnification provided for in this section is
unavailable or insufficient to hold harmless an indemnified party under
subsections (a) or (b) above for any reason other than as provided in subsection
(c) above, then each indemnifying party shall contribute to the amount paid or
payable by such indemnified party as a result of the losses, claims, damages or
liabilities (or actions in
<PAGE> 33
29
respect thereof) referred to in subsection (a) or (b) above (i) in such
proportion as is appropriate to reflect the relative benefits received by the
indemnifying party or parties on the one hand and the indemnified party on the
other or (ii) if the allocation provided by the foregoing clause (i) is not
permitted by applicable law, in such proportion as is appropriate to reflect not
only the relative benefits referred to in clause (i) above but also the relative
fault of the indemnifying party or parties on the one hand and the indemnified
party on the other in connection with the statements or omissions that resulted
in such losses, claims, damages or liabilities (or actions in respect thereof)
as well as any other relevant equitable considerations. The relative fault of
the parties shall be determined by reference to, among other things, whether the
untrue or alleged untrue statement of a material fact or the omission or alleged
omission to state a material fact relates to information supplied by the Company
on the one hand or such Holder or such other indemnified person, as the case may
be, on the other, and the parties' relative intent, knowledge, access to
information and opportunity to correct or prevent such statement or omission.
The amount paid by an indemnified party as a result of the losses, claims,
damages or liabilities referred to in the first sentence of this subsection (d)
shall be deemed to include any legal or other expenses reasonably incurred by
such indemnified party in connection with investigating or defending any action
or claim which is the subject of this subsection (d). Notwithstanding any other
provision of this Section 5(d), the Holders shall not be required to contribute
any amount in excess of the amount by which the net proceeds received by such
Holders from the sale of the Warrants pursuant to the Warrant Shelf Registration
Statement or the Warrant Shares pursuant to the Common Shelf Registration
Statement exceeds the amount of damages which such Holders would have otherwise
been required to pay by reason of such untrue or alleged untrue statement or
omission or alleged omission. No person guilty of fraudulent misrepresentation
(within the meaning of Section 11(f) of the Securities Act) shall be entitled to
contribution from any person who was not guilty of such fraudulent
misrepresentation. For purposes of this paragraph (d), each officer, director,
employee, representative and agent of an indemnified party and each person, if
any, who controls such indemnified party within the meaning of the Securities
Act or the Exchange Act shall have the same rights to contribution as such
indemnified party, and each officer, director, employee, representative and
agent of the Company and each person, if any, who
<PAGE> 34
30
controls the Company within the meaning of the Securities Act or the Exchange
Act shall have the same rights to contribution as the Company.
(e) The agreements contained in this section shall survive the
sale of the Warrants pursuant to the Warrant Shelf Registration Statement and
the sale of the Warrant Shares pursuant to the Common Shelf Registration
Statement, as the case may be, and shall remain in full force and effect,
regardless of any termination or cancellation of this Agreement or any
investigation made by or on behalf of any indemnified party.
SECTION 5.06. Additional Acts. If the sale of Warrants or the
issuance or sale of any Common Stock or other securities issuable upon the
exercise of the Warrants requires registration or approval of any governmental
authority (other than the registration requirements under the Securities Act),
or the taking of any other action under the laws of the United States of America
or any political subdivision thereof before such securities may be validly
offered or sold in compliance with such laws, then the Company covenants that it
will, in good faith and as expeditiously as reasonably possible, endeavor to
secure and maintain such registration or approval or to take such other action,
as the case may be.
SECTION 5.07. Expenses. All expenses incident to the Company's
performance of or compliance with its obligations under this Article 5 will be
borne by the Company, including without limitation: (i) all SEC, stock exchange
or National Association of Securities Dealers, Inc. registration and filing
fees, (ii) all reasonable fees and expenses incurred in connection with
compliance with state securities or blue sky laws, (iii) all expenses of any
Persons incurred by or on behalf of the Company in preparing or assisting in
preparing, printing and distributing the Warrant Shelf Registration Statement,
the Common Shelf Registration Statement or any other registration statement,
prospectus, any amendments or supplements thereto and other documents relating
to the performance of and compliance with this Article 5, (iv) the fees and
disbursements of the Warrant Agent, (v) the fees and disbursements of counsel
for the Company and the Warrant Agent and (vi) the fees and disbursements of the
independent public accountants of the Company, including the expenses of any
special audits or comfort letters required by or incident to such performance
and compliance.
<PAGE> 35
31
ARTICLE 6
Warrant Agent
SECTION 6.01. Appointment of Warrant Agent. The Company hereby
appoints the Warrant Agent to act as agent for the Company in accordance with
the provisions of this Agreement and the Warrant Agent hereby accepts such
appointment.
SECTION 6.02. Rights and Duties of Warrant Agent. (a) Agent
for the Company. In acting under this Warrant Agreement and in connection with
the Warrant Certificates, the Warrant Agent is acting solely as agent of the
Company and does not assume any obligation or relationship or agency or trust
for or with any of the holders of Warrant Certificates or beneficial owners of
Warrants.
(b) Counsel. The Warrant Agent may consult with counsel
satisfactory to it (who may be counsel to the Company), and the advice of such
counsel shall be full and complete authorization and protection in respect of
any action taken, suffered or omitted by it hereunder in good faith and in
accordance with the advice of such counsel.
(c) Documents. The Warrant Agent shall be protected and shall
incur no liability for or in respect of any action taken or thing suffered by it
in reliance upon any Warrant Certificate, notice, direction, consent,
certificate, affidavit, statement or other paper or document reasonably believed
by it to be genuine and to have been presented or signed by the proper parties.
(d) No Implied Obligations. The Warrant Agent shall be
obligated to perform only such duties as are specifically set forth herein and
in the Warrant Certificates, and no implied duties or obligations of the Warrant
Agent shall be read into this Agreement or the Warrant Certificates. The Warrant
Agent shall not be under any obligation to take any action hereunder which may
tend to involve it in any expense or liability for which it does not receive
indemnity if such indemnity is reasonably requested. The Warrant Agent shall not
be accountable or under any duty or responsibility for the use by the Company of
any of the Warrant Certificates countersigned by the Warrant Agent and delivered
by it to the Holders or on behalf of the Holders pursuant to this Agreement or
for the
<PAGE> 36
32
application by the Company of the proceeds of the Warrants. The Warrant Agent
shall have no duty or responsibility in case of any default by the Company in
the performance of its covenants or agreements contained herein or in the
Warrant Certificates or in the case of the receipt of any written demand from a
Holder with respect to such default, including any duty or responsibility to
initiate or attempt to initiate any proceedings at law or otherwise.
(e) Not Responsible for Adjustments or Validity of Stock. The
Warrant Agent shall not at any time be under any duty or responsibility to any
Holder to determine whether any facts exist that may require an adjustment of
the number of shares of Common Stock issuable upon exercise of each Warrant or
the Exercise Price, or with respect to the nature or extent of any adjustment
when made or with respect to the method employed or provided to be employed
herein or in any supplemental agreement in making the same. The Warrant Agent
shall not be accountable with respect to the validity or value of any shares of
Common Stock or of any securities or property which may at any time be issued or
delivered upon the exercise of any Warrant or upon any adjustment pursuant to
Article 4, and it makes no representation with respect thereto. The Warrant
Agent shall not be responsible for any failure of the Company to make any cash
payment or to issue, transfer or deliver any shares of Common Stock or stock
certificates upon the surrender of any Warrant Certificate for the purpose of
exercise or upon any adjustment pursuant to Article 4, or to comply with any of
the covenants of the Company contained in Article 4.
SECTION 6.03. Individual Rights of Warrant Agent. The Warrant
Agent and any stockholder, director, officer or employee of the Warrant Agent
may buy, sell or deal in any of the Warrants or other securities of the Company
or its affiliates or become pecuniarily interested in transactions in which the
Company or its affiliates may be interested, or contract with or lend money to
the Company or its affiliates or otherwise act as fully and freely as though it
were not the Warrant Agent under this Agreement. Nothing herein shall preclude
the Warrant Agent from acting in any other capacity for the Company or for any
other legal entity.
SECTION 6.04. Warrant Agent's Disclaimer. The Warrant Agent
shall not be responsible for and makes no representation as to the validity or
adequacy of this Agreement or the Warrant Certificates and it shall not be
<PAGE> 37
33
responsible for any statement in this Agreement or the Warrant Certificates
other than its countersignature thereon.
SECTION 6.05. Compensation and Indemnity. The Company and the
Warrant Agent have entered into an agreement pursuant to which the Company
agrees to pay the Warrant Agent from time to time reasonable compensation for
its services and to reimburse the Warrant Agent upon request for all reasonable
out-of-pocket expenses incurred by it, including the reasonable compensation and
expenses of the Warrant Agent's agents and counsel. The Company shall indemnify
the Warrant Agent against any loss, liability or expense (including agents' and
attorneys' fees and expenses) incurred by it without negligence or bad faith on
its part arising out of or in connection with the acceptance or performance of
its duties under this Agreement. The Warrant Agent shall notify the Company
promptly of any claim for which it may seek indemnity. The Company need not
reimburse any expense or indemnify against any loss or liability incurred by the
Warrant Agent through wilful misconduct, negligence or bad faith. The Company's
payment obligations pursuant to this Section 6.05 shall survive the termination
of this Agreement.
To secure the Company's payment obligations under this
Agreement, the Warrant Agent shall have a lien prior to the Holders on all money
or property held or collected by the Warrant Agent.
SECTION 6.06. Successor Warrant Agent. (a) The Company to
Provide Warrant Agent. The Company agrees for the benefit of the Holders that
there shall at all times be a Warrant Agent hereunder until all the Warrants
have been exercised or are no longer exercisable.
(b) Resignation and Removal. The Warrant Agent may at any time
resign by giving written notice to the Company of such intention on its part,
specifying the date on which its desired resignation shall become effective;
provided, however, that such date shall not be less than 60 days after the date
on which such notice is given unless the Company otherwise agrees. The Warrant
Agent hereunder may be removed at any time by the filing with it of an
instrument in writing signed by or on behalf of the Company and specifying such
removal and the date when it shall become effective, which date shall not be
less than 60 days after such notice is given unless the Warrant Agent
<PAGE> 38
34
otherwise agrees. Any removal under this Section 6.06 shall take effect upon the
appointment by the Company as hereinafter provided of a successor Warrant Agent
(which shall be a bank or trust company authorized under the laws of the
jurisdiction of its organization to exercise corporate trust powers) and the
acceptance of such appointment by such successor Warrant Agent.
(c) The Company to Appoint Successor. In the event that at any
time the Warrant Agent shall resign, or shall be removed, or shall become
incapable of acting, or shall be adjudged a bankrupt or insolvent, or shall
commence a voluntary case under Federal bankruptcy laws, as now or hereafter
constituted, or under any other applicable Federal or state bankruptcy,
insolvency or similar law, or shall consent to the appointment of or taking
possession by a receiver, custodian, liquidator, assignee, trustee, seques-
trator (or other similar official) of the Warrant Agent or its property or
affairs, or shall make an assignment for the benefit of creditors, or shall
admit in writing its inability to pay its debts generally as they become due, or
shall take corporate action in furtherance of any such action, or a decree or
order for relief by a court having jurisdiction in the premises shall have been
entered in respect of the Warrant Agent in an involuntary case under the Federal
bankruptcy laws, as now or hereafter constituted, or any other applicable
Federal or State bankruptcy, insolvency or similar law, or a decree order by a
court having jurisdiction in the premises shall have been entered for the
appointment of a receiver, custodian, liquidator, assignee, trustee,
sequestrator (or similar official) of the Warrant Agent or of its property or
affairs, or any public officer shall take charge or control of the Warrant Agent
or of its property or affairs for the purpose of rehabilitation, conservation,
winding up or liquidation, a successor Warrant Agent, qualified as aforesaid,
shall be appointed by the Company by an instrument in writing filed with the
successor Warrant Agent. Upon the appointment as aforesaid of a successor
Warrant Agent and acceptance by the successor Warrant Agent of such appointment,
the Warrant Agent shall cease to be the Warrant Agent hereunder; provided,
however, that in the event of the resignation of the Warrant Agent hereunder,
such resignation shall be effective on the earlier of (i) the date specified in
the Warrant Agent's notice of resignation and (ii) the appointment and
acceptance of a successor Warrant Agent hereunder.
<PAGE> 39
35
(d) Successor To Expressly Assume Duties. Any successor
Warrant Agent appointed hereunder shall execute, acknowledge and deliver to its
predecessor and to the Company an instrument accepting such appointment
hereunder, and thereupon such successor Warrant Agent, without any further act,
deed or conveyance, shall become vested with all the rights and obligations of
such predecessor with like effect as if originally named as Warrant Agent
hereunder, and such predecessor, upon payment of its charges and disbursements
then unpaid, shall thereupon become obligated to transfer, deliver and pay over,
and such successor Warrant Agent shall be entitled to receive, all monies,
securities and other property on deposit with or held by such predecessor, as
Warrant Agent hereunder.
(e) Successor by Merger. Any corporation into which the
Warrant Agent hereunder may be merged or consolidated, or any corporation
resulting from any merger or consolidation to which the Warrant Agent shall be a
party, or any corporation to which the Warrant Agent shall sell or otherwise
transfer all or substantially all the assets and business of the Warrant Agent,
provided that it shall be qualified as aforesaid, shall be the successor Warrant
Agent under this Agreement without the execution or filing of any paper or any
further act on the part of any of the parties hereto.
ARTICLE 7
Miscellaneous
SECTION 7.01. SEC Reports and Other Information.
Notwithstanding that the Company may not be subject to the reporting
requirements of Section 13 or 15(d) of the Exchange Act, the Company shall file
with the SEC and thereupon provide the Warrant Agent and Holders with such
annual reports and such information, documents and other reports as are
specified in Sections 13 and 15(d) of the Exchange Act and applicable to a U.S.
corporation subject to such Sections, such information, documents and other
reports to be so filed and provided at the times specified for the filing of
such information, documents and reports under such Sections.
SECTION 7.02. Persons Benefitting. Nothing in this Agreement
is intended or shall be construed to confer upon any Person other than the
Company, the Warrant Agent
<PAGE> 40
36
and the Holders any right, remedy or claim under or by reason of this agreement
or any part hereof.
SECTION 7.03. Rights of Holders. Holders of unexercised
Warrants are not entitled to (i) receive dividends or other distributions, (ii)
receive notice of or vote at any meeting of the stockholders, (iii) consent to
any action of the stockholders, (iv) receive notice as stockholders of any other
proceedings of the Company, (v) exercise any preemptive rights or (vi) exercise
any other rights whatsoever as stockholders of the Company.
SECTION 7.04. Amendment. This Agreement may be amended by the
parties hereto without the consent of any Holder for the purpose of curing any
ambiguity, or of curing, correcting or supplementing any defective provision
contained herein or adding or changing any other provisions with respect to
matters or questions arising under this Agreement as the Company and the Warrant
Agent may deem necessary or desirable (including without limitation any addition
or modification to provide for compliance with the transfer restrictions set
forth herein); provided, however, that such action shall not adversely affect
the rights of any of the Holders. Any amendment or supplement to this Agreement
that has an adverse effect on the interests of the Holders shall require the
written consent of the Holders of a majority of the then outstanding Warrants.
The consent of each Holder affected shall be required for any amendment pursuant
to which the Exercise Price would be increased or the number of Warrant Shares
issuable upon exercise of Warrants would be decreased (other than pursuant to
adjustments provided herein). In determining whether the Holders of the required
number of Warrants have concurred in any direction, waiver or consent, Warrants
owned by the Company or by any Person directly or indirectly controlling or
controlled by or under direct or indirect common control with the Company shall
be disregarded and deemed not to be outstanding, except that, for the purpose of
determining whether the Warrant Agent shall be protected in relying on any such
direction, waiver or consent, only Warrants which the Warrant Agent knows are so
owned shall be so disregarded. Also, subject to the foregoing, only Warrants
outstanding at the time shall be considered in any such determination.
SECTION 7.05. Notices. Any notice or communication shall be in
writing and delivered in Person or mailed by first-class mail addressed as
follows:
<PAGE> 41
37
if to the Company:
372 Danbury Road
Wilton, Connecticut 06897
Attention: President
with a copy to:
Krugman, Chapnick & Grimsley
Park 80 West--Plaza Two
Saddle Brook, New Jersey 07663
Attention: Howard Kailes
if to the Warrant Agent:
American Stock Transfer & Trust Company
40 Wall Street
New York, NY 10005
The Company or the Warrant Agent by notice to the other may
designate additional or different addresses for subsequent notices or
communications.
Any notice or communication mailed to a Holder shall be mailed
to the Holder at the Holder's address as it appears on the Certificate Register
and shall be sufficiently given if so mailed within the time prescribed.
Failure to mail a notice or communication to a Holder or any
defect in it shall not affect its sufficiency with respect to other Holders. If
a notice or communication is mailed in the manner provided above, it is duly
given, whether or not the addressee receives it.
SECTION 7.06. Governing Law. The laws of the State of New York
shall govern this Agreement and the Warrant Certificates.
SECTION 7.07. Successors. All agreements of the Company in
this Agreement and the Warrant Certificates shall bind its successors. All
agreements of the Warrant Agent in this Agreement shall bind its successors.
SECTION 7.08. Multiple Originals. The parties may sign any
number of copies of this Agreement. Each signed copy shall be an original, but
all of them together represent the same agreement. One signed copy is enough to
prove this Agreement.
<PAGE> 42
38
SECTION 7.09. Table of Contents. The table of contents and
headings of the Articles and Sections of this Agreement have been inserted for
convenience of reference only, are not intended to be considered a part hereof
and shall not modify or restrict any of the terms or provisions hereof.
SECTION 7.10. Severability. The provisions of this Agreement
are severable, and if any clause or provision shall be held invalid, illegal or
unenforceable in whole or in part in any jurisdiction, then such invalidity or
unenforceability shall affect in that jurisdiction only such clause or
provision, or part thereof, and shall not in any manner affect such clause or
provision in any other jurisdiction or any other clause or provision of this
Agreement in any jurisdiction.
IN WITNESS WHEREOF, the parties have caused this Agreement to
be duly executed as of the date first written above.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.,
by /s/ William B. Fisher
---------------------------------
Name: William B. Fisher
Title: Vice President, Finance
AMERICAN STOCK TRANSFER &
TRUST COMPANY, as Warrant
Agent,
by /s/ Carolyn Schwartz
---------------------------------
Name: Carolyn Schwartz
Title: Vice President
<PAGE> 43
EXHIBIT A
[FORM OF FACE OF WARRANT CERTIFICATE]
THE WARRANTS REPRESENTED BY THIS CERTIFICATE WERE INITIALLY ISSUED AS PART OF AN
ISSUANCE OF UNITS, EACH OF WHICH CONSISTS OF $1,000 PRINCIPAL AMOUNT AT MATURITY
OF 13 1/4% SENIOR DISCOUNT NOTES DUE 2004 OF ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC. (THE "NOTES") AND ONE WARRANT. PRIOR TO 5:00 P.M., NEW YORK
CITY TIME, ON THE DATE OF THE COMMENCEMENT OF AN EXCHANGE OFFER OR THE
EFFECTIVENESS OF A SHELF REGISTRATION STATEMENT FOR THE NOTES OR SUCH EARLIER
DATE AFTER FEBRUARY 24, 1997, AS CREDIT SUISSE FIRST BOSTON CORPORATION AND UBS
SECURITIES LLC MAY, IN THEIR DISCRETION, DEEM APPROPRIATE, THE WARRANTS
REPRESENTED BY THIS CERTIFICATE MAY NOT BE TRANSFERRED OR EXCHANGED SEPARATELY
FROM, BUT MAY BE TRANSFERRED OR EXCHANGED ONLY TOGETHER WITH, THE NOTES.
THE COMMON STOCK, PAR VALUE $0.01 PER SHARE, OF THE COMPANY FOR WHICH THIS
WARRANT IS EXERCISABLE MAY NOT BE OFFERED OR SOLD IN THE UNITED STATES ABSENT
REGISTRATION UNDER THE SECURITIES ACT OF 1933, AS AMENDED (THE "SECURITIES
ACT"), AND ANY APPLICABLE STATE SECURITIES LAWS OR AN APPLICABLE EXEMPTION FROM
SUCH REGISTRATION REQUIREMENTS. ACCORDINGLY, NO HOLDER SHALL BE ENTITLED TO
EXERCISE SUCH HOLDER'S WARRANTS AT ANY TIME UNLESS, AT THE TIME OF EXERCISE, (i)
A REGISTRATION STATEMENT UNDER THE SECURITIES ACT RELATING TO THE SHARES OF
COMMON STOCK ISSUABLE UPON THE EXERCISE OF THIS WARRANT HAS BEEN FILED WITH, AND
DECLARED EFFECTIVE BY, THE SECURITIES AND EXCHANGE COMMISSION (THE "SEC"), AND
NO STOP ORDER SUSPENDING THE EFFECTIVENESS OF SUCH REGISTRATION STATEMENT HAS
BEEN ISSUED BY THE SEC, OR (ii) THE ISSUANCE OF SUCH SHARES IS PERMITTED
PURSUANT TO AN EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE SECURITIES
ACT AND ANY APPLICABLE STATE SECURITIES LAWS.
UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE
DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), NEW YORK, NEW YORK, TO
THE COMPANY OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE OR PAYMENT, AND
ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR SUCH OTHER
NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS
MADE TO CEDE & CO., OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED
REPRESENTATIVE OF DTC) ANY TRANSFER, PLEDGE OR OTHER USE HEREOF FOR VALUE OR
OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER
HEREOF, CEDE & CO., HAS AN INTEREST HEREIN.
TRANSFERS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO TRANSFERS IN WHOLE, BUT
NOT IN PART, TO NOMINEES OF DTC OR TO A SUCCESSOR THEREOF OR SUCH SUCCESSOR'S
NOMINEE AND TRANSFERS OF PORTIONS OF THIS GLOBAL SECURITY SHALL BE LIMITED TO
TRANSFERS MADE IN ACCORDANCE WITH THE RESTRICTIONS SET FORTH IN THE INDENTURE
REFERRED TO ON THE REVERSE HEREOF.
THIS SECURITY (OR ITS PREDECESSOR) WAS ORIGINALLY ISSUED IN A TRANSACTION EXEMPT
FROM REGISTRATION UNDER THE UNITED STATES SECURITIES ACT OF 1933 (THE
"SECURITIES ACT"), AND THIS SECURITY MAY NOT BE OFFERED, SOLD OR OTHERWISE
TRANSFERRED IN THE ABSENCE OF SUCH REGISTRATION OR AN APPLICABLE EXEMPTION
THEREFROM. EACH PURCHASER OF THIS SECURITY IS HEREBY NOTIFIED THAT THE SELLER OF
THIS SECURITY MAY BE RELYING ON THE EXEMPTION FROM THE PROVISIONS OF SECTION 5
OF THE SECURITIES ACT PROVIDED BY RULE 144A THEREUNDER.
THE HOLDER OF THIS SECURITY AGREES FOR THE BENEFIT OF THE COMPANY THAT, PRIOR TO
THE DATE (THE "RESALE RESTRICTION TERMINATION DATE") WHICH IS
<PAGE> 44
2
THREE YEARS AFTER THE LATER OF THE ORIGINAL ISSUE DATE HEREOF AND THE LAST DATE
ON WHICH THE ISSUER OR ANY AFFILIATE OF THE ISSUER WAS THE OWNER OF THIS
SECURITY (OR ANY PREDECESSOR OF SUCH SECURITY), (A) THIS SECURITY MAY BE
OFFERED, RESOLD, PLEDGED OR OTHERWISE TRANSFERRED ONLY (i) TO A PERSON WHOM THE
SELLER REASONABLY BELIEVES IS A QIB (AS DEFINED IN RULE 144A UNDER THE
SECURITIES ACT) IN A TRANSACTION MEETING THE REQUIREMENTS OF RULE 144A, (ii) IN
AN OFFSHORE TRANSACTION IN ACCORDANCE WITH RULE 904 UNDER THE SECURITIES ACT,
(iii) PURSUANT TO AN EXEMPTION FROM REGISTRATION UNDER THE SECURITIES ACT
PROVIDED BY RULE 144 THEREUNDER (IF AVAILABLE), (iv) TO THE COMPANY OR (v)
PURSUANT TO AN EFFECTIVE REGISTRATION STATEMENT UNDER THE SECURITIES ACT, IN
EACH OF CASES (i) THROUGH (v) IN ACCORDANCE WITH ANY APPLICABLE SECURITIES LAWS
OF ANY STATE OF THE UNITED STATES, AND (B) THE HOLDER WILL, AND EACH SUBSEQUENT
HOLDER IS REQUIRED TO, NOTIFY ANY PURCHASER OF THIS SECURITY FROM IT OF THE
RESALE RESTRICTIONS REFERRED TO IN (A) ABOVE. THIS LEGEND WILL BE REMOVED UPON
THE REQUEST OF THE HOLDER AFTER THE RESALE RESTRICTION TERMINATION DATE.
BY ITS ACQUISITION HEREOF, THE HOLDER REPRESENTS THAT (A) IT IS A "QUALIFIED
INSTITUTIONAL BUYER" (AS DEFINED IN RULE 144A UNDER THE SECURITIES ACT) OR (B)
IT IS AN INSTITUTIONAL "ACCREDITED INVESTOR" (AS DEFINED IN RULE
501(A)(1),(2),(3) OR (7) UNDER THE SECURITIES ACT) OR (C) IT IS NOT A U.S.
PERSON AND IS ACQUIRING THE SECURITY IN AN OFFSHORE TRANSACTION IN ACCORDANCE
WITH REGULATIONS.
IN CONNECTION WITH ANY TRANSFER, THE HOLDER WILL DELIVER TO THE REGISTRAR AND
TRANSFER AGENT SUCH CERTIFICATES AND OTHER INFORMATION AS SUCH TRANSFER AGENT
MAY REASONABLY REQUIRE TO CONFIRM THAT THE TRANSFER COMPLIES WITH THE FOREGOING
RESTRICTIONS.
No. [ ] Certificate for Warrants
WARRANTS TO PURCHASE COMMON STOCK OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
THIS CERTIFIES THAT [ ], or its registered assigns, is the
registered holder of the number of Warrants set forth above (the "Warrants").
Each Warrant entitles the holder thereof (the "Holder"), at its option and
subject to the provisions contained herein and in the Warrant Agreement referred
to below, to purchase from Electronic Retailing Systems International, Inc., a
Delaware corporation ("the Company"), 17.23 shares of Common Stock, par value of
$0.01 per share, of the Company (the "Common Stock") at the per share exercise
price of $5.23 (the "Exercise Price"), or by Cashless Exercise referred to
below. This Warrant Certificate shall terminate and become void as of the close
of business on February 1, 2004 (the "Expiration Date") or upon the exercise
hereof as to all the shares of Common Stock subject hereto. The number of shares
issuable upon exercise of the Warrants and the Exercise Price per share shall be
subject to adjustment from time to time as set forth in the Warrant Agreement.
This Warrant Certificate is issued under and in accordance
with a Warrant Agreement dated as of January 24, 1997 (the "Warrant Agreement"),
between the Company and American Stock Transfer & Trust
<PAGE> 45
3
Company (the "Warrant Agent", which term includes any successor Warrant Agent
under the Warrant Agreement), and is subject to the terms and provisions
contained in the Warrant Agreement, to all of which terms and provisions the
Holder of this Warrant Certificate consents by acceptance hereof. The Warrant
Agreement is hereby incorporated herein by reference and made a part hereof.
Reference is hereby made to the Warrant Agreement for a full statement of the
respective rights, limitations of rights, duties and obligations of the Company,
the Warrant Agent and the Holders of the Warrants. Capitalized terms used but
not defined herein shall have the meanings ascribed thereto in the Warrant
Agreement. A copy of the Warrant Agreement may be obtained for inspection by the
Holder hereof upon written request to the Warrant Agent at 40 Wall Street, New
York, New York 10005, attention of Carolyn O'Neill.
Subject to the terms of the Warrant Agreement, the Warrants
may be exercised in whole or in part (i) by presentation of this Warrant
Certificate with the Election to Purchase attached hereto duly executed and with
the simultaneous payment of the Exercise Price in cash (subject to adjustment)
to the Warrant Agent for the account of the Company at the office of the Warrant
Agent or (ii) by Cashless Exercise. Payment of the Exercise Price in cash shall
be made by certified or official bank check payable to the order of the Company
or by wire transfer of funds to an account designated by the Company for such
purpose. Payment by Cashless Exercise shall be made without the payment of cash
by reducing the amount of Common Stock that would be obtainable upon the
exercise of a Warrant and payment of the Exercise Price in cash so as to yield a
number of shares of Common Stock upon the exercise of such Warrant equal to the
product of (1) the number of shares of Common Stock for which such Warrant is
exercisable as of the Exercise Date (if the Exercise Price were being paid in
cash) and (2) a fraction, the numerator of which is the excess of the Current
Market Value per share of Common Stock on the Exercise Date over the Exercise
Price per share as of the Exercise Date and the denominator of which is the
Current Market Value per share of the Common Stock on the Exercise Date.
As provided in the Warrant Agreement and subject to the terms
and conditions therein set forth, the Warrants shall be exercisable at any time
on or after January 24, 1998; provided, however, that Holders of Warrants will
be able to exercise their Warrants only if a Shelf Registration Statement
relating to the Common Stock underlying the Warrant is effective or the exercise
of such Warrants is exempt from the registration requirements of the Securities
Act of 1933 and such securities are qualified for sale or exempt from
qualification under the applicable securities laws of the states or other
jurisdictions in which such Holders reside; provided further, however, that no
Warrant shall be exercisable after February 1, 2004.
In the event the Company enters into a Combination, the Holder
hereof will be entitled to receive upon exercise of the Warrants the kind and
amount of shares of capital stock or other securities or other property of such
surviving entity as the Holder would have been entitled to receive upon or as a
result of the combination had the Holder exercised its Warrants immediately
prior to such Combination; provided, however, that in the event that, in
connection with such Combination, consideration to holders of Common Stock in
exchange for their shares is payable solely in cash or in the event of the
dissolution, liquidation or winding-up of the Company, the Holder hereof
<PAGE> 46
4
will be entitled to receive such cash distributions as the Holder would have
received had the Holder exercised its Warrants immediately prior to such
Combination, less the Exercise Price.
As provided in the Warrant Agreement, the number of shares of
Common Stock issuable upon the exercise of the Warrants and the Exercise Price
are subject to adjustment upon the happening of certain events.
The Company may require payment of a sum sufficient to pay all
taxes, assessments or other governmental charges in connection with the transfer
or exchange of the Warrant Certificates pursuant to Section 2.06 of the Warrant
Agreement, but not for any exchange or original issuance (not involving a
transfer) with respect to temporary Warrant Certificates, the exercise of the
Warrants or the Warrant Shares.
Upon any partial exercise of the Warrants, there shall be
countersigned and issued to the Holder hereof a new Warrant Certificate
representing those Warrants which were not exercised. This Warrant Certificate
may be exchanged at the office of the Warrant Agent by presenting this Warrant
Certificate properly endorsed with a request to exchange this Warrant
Certificate for other Warrant Certificates evidencing an equal number of
Warrants. No fractional Warrant Shares will be issued upon the exercise of the
Warrants, but the Company shall pay an amount in cash equal to the Current
Market Value per Warrant Share on the day immediately preceding the date the
Warrant is exercised, multiplied by the fraction of a Warrant Share that would
be issuable on the exercise of any Warrant.
All shares of Common Stock issuable by the Company upon the
exercise of the Warrants shall, upon such issue, be duly and validly issued and
fully paid and non-assessable.
The holder in whose name the Warrant Certificate is registered
may be deemed and treated by the Company and the Warrant Agent as the absolute
owner of the Warrant Certificate for all purposes whatsoever and neither the
Company nor the Warrant Agent shall be affected by notice to the contrary.
<PAGE> 47
5
The Warrants do not entitle any holder hereof to any of the
rights of a shareholder of the Company.
This Warrant Certificate shall not be valid or obligatory for
any purpose until it shall have been countersigned by the Warrant Agent.
ELECTRONIC RETAILING SYSTEMS
INTERNATIONAL, INC.
by______________________________________
[SEAL]
Attest:______________________
Secretary
DATED:
Countersigned:
AMERICAN STOCK TRANSFER & TRUST COMPANY,
as Warrant Agent,
by___________________________
Authorized Signatory
<PAGE> 48
6
FORM OF ELECTION TO PURCHASE WARRANT CERTIFICATES
(to be executed only upon exercise of Warrants)
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
The undersigned hereby irrevocably elects to exercise [ ]
Warrants at an exercise price per Warrant (subject to adjustment) of $5.23 to
acquire [ ] shares of Common Stock, par value $0.01 per share, of Electronic
Retailing Systems International, Inc. on the terms and conditions specified
within the Warrant Certificate and the Warrant Agreement therein referred to,
surrenders this Warrant Certificate and all right, title and interest therein to
Electronic Retailing Systems International, Inc. and directs that the shares of
Common Stock deliverable upon the exercise of such Warrants be registered or
placed in the name and at the address specified below and delivered thereto.
Date:__________, 19____
______________________________________(1)
(Signature of Owner)
________________________________________
(Street Address)
________________________________________
(City) (State) (Zip Code)
Signature Guaranteed by:
________________________________________
- --------
(1) The signature must correspond with the name as written upon the face of the
within Warrant Certificate in every particular, without alteration or
enlargement or any change whatsoever, and must be guaranteed by a national
bank or trust company or by a member firm of any national securities
exchange.
<PAGE> 49
7
Securities and/or check to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
Any unexercised Warrants represented by the Warrant Certificate to be issued to:
Please insert social security or identifying number:
Name:
Street Address:
City, State and Zip Code:
<PAGE> 50
EXHIBIT B
CERTIFICATE TO BE DELIVERED UPON EXCHANGE OR
REGISTRATION OF TRANSFER OF WARRANTS
Re: Warrants to Purchase Common Stock (the "Warrants") of
Electronic Retailing Systems International, Inc. (the
"Company")
This Certificate relates to Warrants held in definitive form
by _______________ (the "Transferor").
The Transferor has requested the Warrant Agent by written
order to exchange or register the transfer of a Warrant or Warrants. In
connection with such request and in respect of each such Warrant, the Transferor
does hereby certify that the Transferor is familiar with the Warrant Agreement
relating to the above captioned Warrants and that the transfer of this Warrant
does not require registration under the Securities Act of 1933, (the "Securities
Act") because *:
/ / Such Warrant is being transferred to the Company.
/ / Such Warrant is being transferred pursuant to an effective
Registration Statement under the Securities Act.
/ / Such Warrant is being transferred to a qualified institutional
buyer (as defined in Rule 144A under the Securities Act) in reliance on Rule
144A.
/ / Such Warrant is being transferred pursuant to an offshore
transaction in accordance with Rule 904 under the Securities Act.
Such Warrant is being transferred in a transaction meeting the
requirements of Rule 144 under the Securities Act.
The Warrant Agent and the Company are entitled to rely upon
this Certificate and are irrevocably authorized to produce this Certificate or a
copy hereof to any interested party in any administrative or legal proceedings
or official inquiry with respect to the matters covered hereby.
________________________________________
[INSERT NAME OF TRANSFEROR]
by
Date:________________________ ______________________________________
- --------
*Please check applicable box.
<PAGE> 1
EXHIBIT 10.22
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
1993 EMPLOYEE STOCK OPTION PLAN
1. Purposes of Plan. The purposes of this Plan, which shall be
known as the Electronic Retailing Systems International, Inc. 1993 Employee
Stock Option Plan, and is hereinafter referred to as the "Plan", are (i) to
provide incentives for key employees of Electronic Retailing Systems
International, Inc. (the "Company") and any parent and subsidiary corporations
(within the respective meanings of Sections 424(e) and 424(f) of the Internal
Revenue Code of 1986, as amended [the "Code"], and referred to herein as
"Parent" and "Subsidiary", respectively), and to consultants and other
individuals providing services to such companies, by encouraging their ownership
of the common stock, $.01 par value (the "Common Stock"), of the Company, and
(ii) to aid the Company in retaining such key employees and other persons, upon
whose efforts the Company's success and future growth depends, and attracting
other such employees and other persons.
2. Administration. The Plan shall be administered by the
Compensation Committee (the "Committee") of the Board of Directors, as
hereinafter provided. Subject to the terms of the Plan, the Committee shall have
plenary authority to determine the key employees, consultants and other
individuals to whom options are to be granted under the Plan, the number of
shares to be subject to each such option, the terms and conditions upon which
the options are granted and are exercisable and whether such options will be
incentive stock options or non-qualified stock options. For purposes of
administration, the Committee, subject to the terms of the Plan, shall have
plenary authority to establish such rules and regulations, make such
determinations and interpretations and take such other administrative actions as
it deems necessary or advisable. All determinations and interpretations made by
the Committee shall be final, conclusive and binding on all persons, including
Optionees (as hereinafter defined) and their legal representatives and
beneficiaries.
The Committee shall be appointed from time to time by the
Board of Directors and shall consist of not less than two of its members. The
Board of Directors shall designate one of the members of the Committee as its
Chairman. The Committee shall hold its meetings at such times and at such places
as it may determine. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members. Any
decision or determination reduced to writing and signed by all members shall be
as effective as if it had been made by a majority vote at a meeting duly called
and held. The Committee may appoint a secretary (who need not be a member of the
Committee). No member of the Committee shall be liable for any act or omission
with respect to his service on the Committee if he acts
<PAGE> 2
in good faith and in a manner he reasonably believes to be in or not opposed to
the best interests of the Company. Service on the Committee shall constitute
service as a director of the Company for all purposes.
3. Stock Available for Options. There shall be available for
options under the Plan a total of 1,775,000 shares of Common Stock, subject to
any adjustments which may be made pursuant to Section 5(f) hereof. Shares of
Common Stock used for purposes of the Plan may be either authorized and unissued
shares, or previously issued shares held in the treasury of the Company, or
both. Shares of Common Stock covered by options which have terminated or expired
prior to exercise shall be available for further options hereunder.
4. Eligibility. Options under the Plan may be granted to key
employees of the Company or any Parent or Subsidiary thereof, including officers
of the Company or any Parent or Subsidiary thereof, and to consultants and other
individuals providing services to the Company or any Parent or Subsidiary.
Options may not be granted under the Plan to any member of the Board of
Directors of the Company (whether or not a key employee of, or a consultant or
other individual providing services to, the Company or any Parent or
Subsidiary). Options may be granted to eligible individuals whether or not they
hold or have held options previously granted under the Plan or otherwise granted
or assumed by the Company. In selecting individuals for options, the Committee
may take into consideration any factors it may deem relevant, including its
estimate of the individual's present and potential contributions to the success
of the Company and/or any Parent or Subsidiary thereof. Service as a consultant
of or to the Company or any Parent or Subsidiary shall be considered employment
for purposes of the Plan (and the period of such service shall be considered the
period of employment for purposes of Section 5(d) of the Plan); provided,
however, that incentive stock options may be granted under the Plan only to an
individual who is an "employee" (as such term is used in Section 422 of the
Code) of the Company or any Subsidiary or Parent.
5. Terms and Conditions of Options. The Committee shall, in
its discretion, prescribe the terms and conditions of the options to be granted
hereunder which terms and conditions need not be the same in each case, subject
to the following:
(a) Option Price. The price at which each share of
Common Stock covered by an option granted under the Plan may be purchased shall
be determined by the Committee and shall not be less than the par value per
share of Common Stock. The date of the grant of an option shall be the date
specified by the Committee in its grant of the option.
(b) Option Period. The period for exercise of an
2
<PAGE> 3
option shall in no event be more than ten years from the date of grant. Options
may, in the discretion of the Committee, become vested and be made exercisable
in installments during the option period. Any shares not purchased on any
applicable installment date may be purchased thereafter at any time before the
expiration of the option period.
(c) Exercise of Options. In order to exercise an
option, the holder thereof (the "Optionee") shall deliver to the Company written
notice specifying the number of shares of Common Stock to be purchased, together
with cash or a certified or bank cashier's check payable to the order of the
Company in the full amount of the purchase price therefor; provided that, for
the purpose of assisting an Optionee to exercise an option, the Company may make
loans to the Optionee or guarantee loans made by third parties to the Optionee,
on such terms and conditions as the Board of Directors may authorize and
approve; and provided further that such purchase price may be paid in shares of
Common Stock owned by the Optionee having a market value on the date of exercise
equal to the aggregate purchase price, or in a combination of cash and Common
Stock. For purposes of the Plan, the market value per share of Common Stock
shall be the last sale price regular way on the date of reference, or, in case
no sale takes place on such day, the average of the closing bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, or if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
last sale price of the Common Stock as reported on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") National Market System on such
date, or if the Common Stock is not so reported, the average of the closing high
bid and low asked prices of the Common Stock in the over-the-counter market on
such date, as reported on the NASDAQ system, or if there are no such prices
reported on the NASDAQ system on such date, as furnished to the Committee by a
New York Stock Exchange member selected from time to time by the Committee for
such purpose. If there is no bid or asked price reported on any such date, the
market value shall be determined by the Committee in accordance with the
regulations promulgated under Section 2031 of the Code, or by any other
appropriate method selected by the Committee. An Optionee shall have none of the
rights of a stockholder until the shares of Common Stock are issued to him. An
option may not be exercised for less than ten shares of Common Stock, or the
number of shares of Common Stock remaining subject to such option, whichever is
smaller.
(d) Effect of Termination of Employment. An option
may not be exercised after the Optionee has ceased to be in the employ of the
Company or any Parent or Subsidiary, except that:
(i) if, subsequent to any vesting date specified in the
option, the Optionee's employment is terminated by action of
3
<PAGE> 4
his employer for reasons other than "cause" (as hereinafter defined),
or by the Optionee (unless his employer shall have grounds to terminate
his employment for "cause"), the option may be exercised by the
Optionee within the period specified in the terms of the option;
(ii) In the event of the death of the Optionee after
termination of employment covered by (i) above, the person or persons
to whom his rights are transferred by will or the laws of descent and
distribution shall have a period specified in the terms of the option
to exercise such option;
(iii) in the event of the death of the Optionee while
employed, the person or persons to whom the Optionee's rights are
transferred by will or the laws of descent and distribution shall have
a period specified in the terms of the option to exercise such option.
For purposes hereof "cause" means (i) an Optionee's conviction of a
felony involving moral turpitude with respect to the business of the Company or
any Parent or Subsidiary thereof, (ii) an Optionee's willful violation of
directions of the Board or the Chief Executive Officer of the Company or any
Parent or Subsidiary thereof, (iii) an Optionee's engaging in conduct which
constitutes willful neglect or willful misconduct in connection with the
performance of his duties or (iv) an Optionee's engaging in conduct which
violates the terms or conditions of his option grant. Nothing in the Plan or in
any option granted pursuant to the Plan (in the absence of an express provision
to the contrary) shall confer on any individual any right to continue in the
employ of the Company or any Parent or Subsidiary thereof or interfere in any
way with the right of the Company to terminate his employment at any time.
(e) Nontransferability of Options. During the
lifetime of an Optionee, options held by such Optionee shall be exercisable only
by him. No option shall be transferable other than by will or by the laws of
descent and distribution.
(f) Adjustments for Change in Stock Subject to Plan
and Other Events. In the event of a reorganization, recapitalization, stock
split, stock dividend, combination of shares, merger, consolidation, rights
offering, or any other change in the corporate structure or shares of the
Company, the Committee shall make such adjustments, if any, as it deems
appropriate in the number and kind of shares subject to the Plan, in the number
and kind of shares covered by outstanding options, or in the option price per
share.
(g) Acceleration of Exercisability of Options Upon
Occurrence of Certain Events. In connection with any merger or consolidation in
which the Company is not the surviving
4
<PAGE> 5
corporation or any sale or transfer by the Company of all or substantially all
its assets or any tender offer or exchange offer for or the acquisition,
directly or indirectly, by any person or group of all or a majority of the then
outstanding voting securities of the Company, all outstanding options under the
Plan shall, at the election of the Committee, become exercisable in full,
notwithstanding any other provision of the Plan or of any outstanding options
granted thereunder, on and after (1) the fifteenth day prior to the effective
date of such merger, consolidation, sale, transfer or acquisition or (ii) the
date of commencement of such tender offer or exchange offer, as the case may be.
The provisions of the foregoing sentence shall apply to any outstanding options
which are incentive stock options to the extent permitted by Section 422(d) of
the Code and such outstanding options in excess thereof shall, immediately upon
the occurrence of the event described in clause (i) and (ii) of the foregoing
sentence, be treated for all purposes of the plan as nonstatutory stock options
and shall be immediately exercisable as such as provided in the foregoing
sentence. Notwithstanding the foregoing, in no event shall any option be
exercisable after the date of termination of the exercise period of such option
specified in Sections 5(b), 5(d) and 6.
(h) Registration, Listing and Qualification Shares of
Stock. Each option shall be subject to the requirement that if at any time the
Board of Directors shall determine that the registration, listing or
qualification of the shares of Common Stock covered thereby upon any securities
exchange or under any federal or state law, or the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the granting of such option or the purchase of shares of Common
Stock thereunder, no such option may be exercised unless and until such
registration, listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. The Company may require that any person exercising an option shall
make such representations and agreements and furnish such information as it
deems appropriate to assure compliance with the foregoing or any other
applicable legal requirement.
(i) Other Terms and Conditions. The Committee may
impose such other terms and conditions, not inconsistent with the terms hereof,
on the grant or exercise of options, as it deems advisable.
6. Provisions Applicable to Incentive Stock Options. The
Committee may, in its discretion, grant "incentive stock options" (within the
meaning of Section 422 of the Code) under the Plan to eligible employees,
provided, however, that: (a) no such incentive stock option shall be granted at
an option price which is less than the market value per share of Common Stock on
the date of the grant; (b) no such incentive stock option shall be issued to
5
<PAGE> 6
any one Optionee if the aggregate fair market value, determined at the time of
the grant of such incentive stock options, of the shares with respect to which
such incentive stock options are exercisable for the first time by such Optionee
during any calendar year, together with all options under any other incentive
stock option plan of the Company exercisable during such year, exceeds $100,000;
(c) no such incentive stock option shall be granted to any Optionee who at the
time such option is granted owns more than 10 percent of the total combined
voting stock of the Company unless (i) the option price is not less than 110
percent of the fair market value per share of stock on the date of the grant,
and (ii) the option is not exercisable after five years from the date such
option is granted; (d) Section 5(d) hereof shall not (except for the definition
of "cause" thereunder) apply to any incentive stock option; and (e) no such
incentive stock option may be exercised after the Optionee has ceased to be in
the employ of the Company or any Parent or Subsidiary, except (i) if the
Optionee's employment is terminated by action of his employer for reasons other
than "cause", or by reason of disability or retirement under any retirement plan
maintained by the Company or any Parent or Subsidiary thereof, the incentive
stock option may be exercised by the Optionee within 30 days after such
termination, but only as to any shares exercisable on the date the Optionee's
employment so terminates, and (ii) in the event of the death of the Optionee
while employed, the person or persons to whom his rights are transferred by will
or the laws of descent and distribution shall have a period of one year from the
date of the Optionee's death to exercise any incentive stock options which were
exercisable by the Optionee at the time of his death.
7. Withholding Tax. Upon the exercise of an option granted
pursuant to the Plan, or the disposition by any person of shares of Common Stock
acquired pursuant to the exercise of an option granted pursuant to the Plan, the
Company shall have the right to require such person to pay the Company the
amount of any taxes which the Company may be required to withhold with respect
to such shares.
8. Amendment and Termination. Unless the Plan shall
theretofore have been terminated as hereinafter provided, the Plan shall
terminate on, and no option shall be granted thereunder after March 31, 2003;
provided, however, that the Board of Directors may at any time prior to that
date terminate the Plan. The Board of Directors may at any time amend the Plan;
provided, however, that, except as contemplated in Section 5(f) hereof, the
Board of Directors shall not, without approval by a majority of the votes cast
by the stockholders of the Company at a meeting of stockholders at which a
proposal to amend the Plan is voted upon: (i) increase the maximum number of
shares of Common Stock for which options may be granted under the Plan, (ii)
change the formula as to minimum option prices, (iii) extend the period during
which options may be granted or exercised, or (iv) amend the requirements
6
<PAGE> 7
as to the class of persons eligible to receive options. No termination or
amendment of the Plan may, without the consent of an Optionee, adversely affect
the rights of such Optionee under any option held by such Optionee.
9 Other Actions. Nothing contained in the Plan shall be
construed to limit the authority of the Company to exercise its corporate rights
and powers, including but not by way of limitation, the right of the Company to
grant or assume options for proper corporate purposes other than under the Plan
with respect to any employee or other person, firm, corporation or association.
7
<PAGE> 1
EXHIBIT 10.23
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
1993 DIRECTOR STOCK OPTION PLAN
1. Purposes of Plan. The purposes of this Plan, which shall be
known as the Electronic Retailing Systems International, Inc. 1993 Director
Stock Option Plan, and is hereinafter referred to as the "Plan", are (i) to
provide incentives for members of the Board of Directors of Electronic Retailing
Systems International, Inc. (the "Company") by encouraging their ownership of
the common stock, $.01 par value (the "Common Stock"), of the Company, and (ii)
to aid the Company in retaining such directors, upon whose efforts the Company's
success and future growth depends, and attracting other such directors.
2. Administration. The Plan shall be administered by the
Director Stock Option Committee (the "Committee") of the Board of Directors, as
hereinafter provided. Subject to the terms of the Plan, the Committee shall have
plenary authority to determine the directors to whom options are to be granted,
the number of shares to be subject to each such option, the terms and conditions
upon which the options are granted and are exercisable, and whether such options
will be incentive stock options or non-qualified stock options. For purposes of
administration, the Committee, subject to the terms of the Plan, shall have
plenary authority to establish such rules and regulations, make such
determinations and interpretations, and take such other administrative actions
as it deems necessary or advisable. All determinations and interpretations made
by the Committee shall be final, conclusive and binding on all persons,
including Optionees (as hereinafter defined) and their legal representatives and
beneficiaries.
The Committee shall be appointed from time to time by the
Board of Directors and shall consist of not less than two of its members. The
Board of Directors shall designate one of the members of the Committee as its
Chairman. The Committee shall hold its meetings at such times and at such places
as it may determine. A majority of its members shall constitute a quorum. All
determinations of the Committee shall be made by a majority of its members. Any
decision or determination reduced to writing and signed by all members shall be
as effective as if it had been made by a majority vote at a meeting duly called
and held. The Committee may appoint a secretary (who need not be a member of the
Committee). No member of the Committee shall be liable for any act or omission
with respect to his service on the Committee if he acts in good faith and in a
manner he reasonably believes to be in or not opposed to the best interests of
the Company. Service on the Committee shall constitute service as a director of
the Company for all purposes.
3. Stock Available for Options. There shall be
<PAGE> 2
available for options under the Plan a total of 150,000 shares of Common Stock,
subject to any adjustments which may be made pursuant to Section 5(f) hereof.
Shares of Common Stock used for purposes of the Plan may be either authorized
and unissued shares, or previously issued shares held in the treasury of the
Company, or both. Shares of Common Stock covered by options which have
terminated or expired prior to exercise shall be available for further options
hereunder.
4. Eligibility. Options under the Plan may be granted to
directors of the Company (including officers, key employees and consultants of
the Company). Options may be granted to such directors whether or not they hold
or have held options previously granted under the Plan or otherwise granted or
assumed by the Company. In selecting directors for options, the Committee may
take into consideration any factors it may deem relevant, including its estimate
of the director's present and potential contributions to the success of the
Company.
5. Terms and Conditions of Options. The Committee shall, in
its discretion, prescribe the terms and conditions of the options to be granted
hereunder which terms and conditions need not be the same in each case, subject
to the following:
(a) Option Price. The price at which each share of
Common Stock covered by an option granted under the Plan may be purchased shall
be determined by the Committee and shall not be less than the par value per
share of Common Stock. The date of the grant of an option shall be the date
specified by the Committee in its grant of the option.
(b) Option Period. The period for exercise of an
option shall in no event be more than ten years from the date of grant. Options
may, in the discretion of the Committee, become vested and be made exercisable
in installments during the option period. Any shares not purchased on any
applicable installment date may be purchased thereafter at any time before the
expiration of the option period.
(c) Exercise of Options. In order to exercise an
option, the holder thereof (the "Optionee") shall deliver to the Company written
notice specifying the number of shares of Common Stock to be purchased, together
with cash or a certified or bank cashier's check payable to the order of the
Company in the full amount of the purchase price therefor; provided that, for
the purpose of assisting an Optionee to exercise an option, the Company may make
loans to the Optionee or guarantee loans made by third parties to the Optionee,
on such terms and conditions as the Board of Directors may authorize; and
provided further that such purchase price may be paid in shares of Common Stock
owned by the Optionee having a market value on the date of exercise equal to the
aggregate purchase price, or in a combination of cash and Common
2
<PAGE> 3
Stock. For purposes of the Plan, the market value per share of Common Stock
shall be the last sale price regular way on the date of reference, or, in case
no sale takes place on such day, the average of the closing bid and asked prices
regular way, in either case on the principal national securities exchange on
which the Common Stock is listed or admitted to trading, or if the Common Stock
is not listed or admitted to trading on any national securities exchange, the
last sale price of the Common Stock as reported on the National Association of
Securities Dealers Automated Quotation ("NASDAQ") National Market System on such
date, or if the Common Stock is not so reported, the average of the closing high
bid and low asked prices of the Common Stock in the over-the-counter market on
such date, as reported on the NASDAQ system, or if there are no such prices
reported on the NASDAQ system on such date, as furnished to the Committee by a
New York Stock Exchange member selected from time to time by the Committee for
such purpose. If there is no bid or asked price reported on any such date, the
market value shall be determined by the Committee in accordance with the
regulations promulgated under Section 2031 of the Code, or by any other
appropriate method selected by the Committee. An Optionee shall have none of the
rights of a stockholder until the shares of Common Stock are issued to him. An
option may not be exercised for less than 1,000 shares of Common Stock, or the
number of shares of Common Stock remaining subject to such option, whichever is
smaller.
(d) Effect of Termination of Service. An option may
not be exercised after the Optionee has ceased to be in the service of the
Company or any parent or subsidiary corporations (within the respective meanings
of Sections 424(e) and 424(f) of the Internal Revenue Code of 1986, as amended
[the "Code"], and referred to herein as "Parent" or "Subsidiary", respectively),
whether as a director of the Company or an employee or consultant of the Company
or any Parent or Subsidiary thereof, except in the following circumstances:
(i) if, subsequent to any vesting date specified in
the option: (x) the Optionee's service as a director is
terminated for reasons other than "cause" (as hereinafter
defined), or by the Optionee (unless the Company or any Parent
or Subsidiary thereof shall have grounds to terminate his
service for "cause") and (y) the Optionee is not an employee
or consultant of the Company or any Parent or Subsidiary
thereof; or his employment is terminated for reasons other
than "cause", or by the Optionee (unless his employer shall
have grounds to terminate his services for "cause"); the
option may be exercised by the Optionee, within the period
specified in the terms of the option after the last such
termination;
(ii) in the event of the death of the Optionee after
termination of service and/or employment covered by
3
<PAGE> 4
(i) above, the person or persons to whom his rights are
transferred by will or the laws of descent and distribution
shall have a period specified in the terms of the option to
exercise such option;
(iii) in the event of the death of the Optionee while
serving as a director or employee, the person or persons to
whom the Optionee's rights are transferred by will or the laws
of descent and distribution shall have a period specified in
the terms of the option to exercise such option.
For purposes of this Section 5(d), service as a consultant of
or to the Company or any Parent or Subsidiary shall be considered employment,
and the period of such service shall be considered the period of employment;
provided, however, that incentive stock options may be granted under the Plan
only to a director who is an "employee" (as such term is used in Section 422 of
the Code) of the Company or any Subsidiary or Parent. For purposes hereof
"cause" means (i) an Optionee's conviction of a felony involving moral turpitude
with respect to the business of the Company or any Parent or Subsidiary thereof,
(ii) an Optionee's engaging in conduct which constitutes willful neglect or
willful misconduct in connection with the performance of his duties, (iii) an
Optionee's engaging in conduct which violates the terms or conditions of his
option grant, or (iv) during any period in which the optionee is not a director
of the Company or any Parent or Subsidiary thereof, his willful violation of
directions of the Board or the Chief Executive Officer of the Company or any
Parent or Subsidiary thereof. Nothing in the Plan or in any option granted
pursuant to the Plan (in the absence of an express provision to the contrary)
shall confer on any individual any right to continue in the service of the
Company or any Parent or Subsidiary thereof or interfere in any way with the
right of the Company to terminate his service.
(e) Nontransferability of Options. During the
lifetime of an Optionee, options held by such Optionee shall be exercisable only
by him. No option shall be transferable other than by will or by the laws of
descent and distribution.
(f) Adjustments for Change in Stock Subject to Plan
and Other Events. In the event of a reorganization, recapitalization, stock
split, stock dividend, combination of shares, merger, consolidation, rights
offering, or any other change in the corporate structure or shares of the
Company, the Committee shall make such adjustments, if any, as it deems
appropriate in the number and kind of shares subject to the Plan, in the number
and kind of shares covered by outstanding options, or in the option price per
share.
4
<PAGE> 5
(g) Acceleration of Exercisability of Options Upon
Occurrence of Certain Events. In connection with any merger or consolidation in
which the Company is not the surviving corporation or any sale or transfer by
the Company of all or substantially all its assets or any tender offer or
exchange offer for or the acquisition, directly or indirectly, by any person or
group of all or a majority of the then outstanding voting securities of the
Company, all outstanding options under the Plan shall, at the election of the
Committee, become exercisable in full, notwithstanding any other provision of
the Plan or of any outstanding options granted thereunder, on and after (1) the
fifteenth day prior to the effective date of such merger, consolidation, sale,
transfer or acquisition or (ii) the date of commencement of such tender offer or
exchange offer, as the case may be. The provisions of the foregoing sentence
shall apply to any outstanding options which are incentive stock options to the
extent permitted by Section 422(d) of the Code and such outstanding options in
excess thereof shall, immediately upon the occurrence of the event described in
clause (i) and (ii) of the foregoing sentence, be treated for all purposes of
the plan as nonstatutory stock options and shall be immediately exercisable as
such as provided in the foregoing sentence. Notwithstanding the foregoing, in no
event shall any option be exercisable after the date of termination of the
exercise period of such option specified in Sections 5(b), 5(d) and 6.
(h) Registration, Listing and Qualification Shares of
Stock. Each option shall be subject to the requirement that if at any time the
Board of Directors shall determine that the registration, listing or
qualification of the shares of Common Stock covered thereby upon any securities
exchange or under any federal or state law, or the consent or approval of any
governmental regulatory body is necessary or desirable as a condition of, or in
connection with, the granting of such option or the purchase of shares of Common
Stock thereunder, no such option may be exercised unless and until such
registration, listing, qualification, consent or approval shall have been
effected or obtained free of any conditions not acceptable to the Board of
Directors. The Company may require that any person exercising an option shall
make such representations and agreements and furnish such information as it
deems appropriate to assure compliance with the foregoing or any other
applicable legal requirement.
(i) Other Terms and Conditions. The Committee may
impose such other terms and conditions, not inconsistent with the terms hereof,
on the grant or exercise of options, as it deems advisable.
6. Provisions Applicable to Incentive Stock Options. The
Committee may, in its discretion, grant "incentive stock options" (within the
meaning of Section 422 of the Code), under the Plan to directors provided,
however, that: (a) no such incentive
5
<PAGE> 6
stock option shall be issued to a director of the Company who is not also an
employee or officer of the Company; (b) no such incentive stock option shall be
granted at an option price which is less than the market value per share of
Common Stock on the date of the grant; (c) no such incentive stock option shall
be issued to any one Optionee if the aggregate fair market value, determined at
the time of the grant of such incentive stock options, of the shares with
respect to which such incentive stock options are exercisable for the first time
by such Optionee during any calendar year, together with all options under any
other incentive stock option plan of the Company exercisable during such year,
exceeds $100,000; (d) no such incentive stock option shall be granted to any
Optionee who at the time such option is granted owns more than 10 percent of the
total combined voting stock of the Company unless (i) the option price is not
less than 110 percent of the fair market value per share of stock on the date of
the grant, and (ii) the option is not exercisable after five years from the date
such option is granted; and (e) Section 5(d) hereof shall not (except for the
definition of "cause") apply to any incentive stock option; and (f) no such
incentive stock option may be exercised after the Optionee has ceased to be in
the employ of the Company or any Parent or Subsidiary, except (i) if the
Optionee's employment is terminated by action of his employer for reasons other
than "cause", or by reason of disability or retirement under any retirement plan
maintained by the Company or any Parent or Subsidiary thereof, the incentive
stock option may be exercised by the Optionee within 30 days after such
termination, but only as to any shares exercisable on the date the Optionee's
employment so terminates, and (ii) in the event of the death of the Optionee
while employed, the person or persons to whom his rights are transferred by will
or the laws of descent and distribution shall have a period of one year from the
date of the Optionee's death to exercise any incentive stock options which were
exercisable by the Optionee at the time of his death.
7. Withholding Tax. Upon the exercise of an option granted
pursuant to the Plan, or the disposition by any person of shares of Common Stock
acquired pursuant to the exercise of an option granted pursuant to the Plan, the
Company shall have the right to require such person to pay the Company the
amount of any taxes which the Company may be required to withhold with respect
to such shares.
8. Amendment and Termination. Unless the Plan shall
theretofore have been terminated as hereinafter provided, the Plan shall
terminate on, and no option shall be granted thereunder after March 31, 2003;
provided, however, that the Board of Directors may at any time prior to that
date terminate the Plan. The Board of Directors may at any time amend the Plan;
provided, however, that, except as contemplated in Section 5(f) hereof, the
Board of Directors shall not, without approval by a majority of the votes cast
by the stockholders of the Company at a meeting of stock-
6
<PAGE> 7
holders at which a proposal to amend the Plan is voted upon: (i) increase the
maximum number of shares of Common Stock for which options may be granted under
the Plan, (ii) change the formula as to minimum option prices, (iii) extend the
period during which options may be granted or exercised, or (iv) amend the
requirements as to the class of persons eligible to receive options. No
termination or amendment of the Plan may, without the consent of an Optionee,
adversely affect the rights of such Optionee under any option held by such
Optionee.
9. Other Actions. Nothing contained in the Plan shall be
construed to limit the authority of the Company to exercise its corporate rights
and powers, including but not by way of limitation, the right of the Company to
grant or assume options for proper corporate purposes other than under the Plan
with respect to any employee or other person, firm, corporation or association.
7
<PAGE> 1
EXHIBIT 12.1
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
AND PRO FORMA RATIO OF EARNINGS TO FIXED CHARGES
(AMOUNTS IN THOUSANDS OF DOLLARS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
YEAR ENDED DECEMBER 31, SEPTEMBER 30,
------------------------------------------------------- --------------------
1991 1992 1993 1994 1995 1995 1996
------- -------- -------- -------- -------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C>
Pre-tax loss from continuing operations $(6,206) $(10,364) $(16,420) $(11,278) $(10,868) $ (8,295) $ (6,528)
------- -------- -------- -------- -------- -------- --------
Fixed charges:
Interest expense and amortization 510 922 340 65 291 223 283
Rentals:
Buildings - 33% 32 62 87 86 98 67 70
Office and other leased equipment - 33% -- 2 6 6 13 10 17
------- -------- -------- -------- -------- -------- --------
Total fixed charges 542 986 432 157 402 300 370
------- -------- -------- -------- -------- -------- --------
Earnings before income taxes and
fixed charges (5,664) (9,378) (15,988) (11,121) (10,466) (7,995) (6,158)
------- -------- -------- -------- -------- -------- --------
Ratio of earnings to fixed charges (a) -- -- -- -- -- -- --
======= ======== ======== ======== ======== ======== ========
Deficiency of earnings to fixed charges $(6,206) $(10,364) $(16,420) $(11,278) $(10,868) $ (8,295) $ (6,528)
======= ======== ======== ======== ======== ======== ========
Pro forma ratio of earnings to fixed
charges (a) -- --
======== ========
Deficiency of earnings to pro forma
fixed charges (b) $(26,000) $(17,767)
======== ========
</TABLE>
(a) As a result of losses incurred in the periods presented, the Company was
unable to cover the indicated fixed charges.
(b) Deficiency of earnings to pro forma fixed charges computed as
follows:
<TABLE>
<CAPTION>
Year ended Nine months ended
December 31, September 30,
1995 1996
----------- -----------------
<S> <C> <C>
Deficiency of earnings to fixed charges,
as above $(10,868) $ (6,528)
Adjustments:
Interest expense on 13.25% Senior Discount Notes 13,689 10,157
Amortization of debt discount and issuance costs 1,443 1,082
-------- --------
Deficiency of earnings to pro forma fixed charges $(26,000) $(17,767)
======== ========
</TABLE>
<PAGE> 1
EXHIBIT 15.1
[PRICE WATERHOUSE LLP LETTERHEAD]
February 14, 1997
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
Ladies and Gentlemen:
We are aware that Electronic Retailing Systems International, Inc. has included
our report dated November 14, 1996 (issued pursuant to the provisions of
Statement on Auditing Standards No. 71) in the Prospectus constituting part of
its Registration Statement on Form S-4 to be filed on or about February 14,
1997. We are also aware of our responsibilities under the Securities Act of
1933.
Yours very truly,
Price Waterhouse LLP
<PAGE> 1
EXHIBIT 23.1
CONSENT OF INDEPENDENT ACCOUNTANTS
----------------------------------
We hereby consent to the use in the Prospectus constituting part of this
Registration Statement on Form S-4 of Electronic Retailing Systems
International, Inc. (the "Company") of our report dated March 27, 1996, except
for Note 13, as to which the date is July 11, 1996, relating to the
consolidated financial statements of the Company, which appears in such
Prospectus. We also consent to the reference to us under the heading "Experts"
in such Prospectus.
PRICE WATERHOUSE LLP
Stamford, Connecticut
February 14, 1997
<PAGE> 1
Exhibit 25.1
FORM T-1
==============================================
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------
STATEMENT OF ELIGIBILITY
UNDER THE TRUST INDENTURE ACT OF 1939 OF
A CORPORATION DESIGNATED TO ACT AS TRUSTEE
------------------
CHECK IF AN APPLICATION TO DETERMINE
ELIGIBILITY OF A TRUSTEE PURSUANT TO
SECTION 305(b)(2) _______
------------------
UNITED STATES TRUST COMPANY OF NEW YORK (Exact
name of trustee as specified in its charter)
New York 13-3818954
(Jurisdiction of incorporation (I.R.S. employer
if not a U.S. national bank) identification No.)
114 West 47th Street 10036-1532
New York, NY (Zip Code)
(Address of principal
executive offices)
------------------
Electronic Retailing Systems International, Inc.
(Exact name of obligor as specified in its charter)
Delaware 06-1361276
(State or other jurisdiction of (I.R.S. employer
incorporation or organization) identification No.)
372 Danbury Road
Wilton, CT 06897
(Address of principal executive offices) (Zip Code)
------------------
13-1/4% Senior Discount Notes due 2004
(Title of the indenture securities)
==============================================
<PAGE> 2
- 2 -
GENERAL
1. GENERAL INFORMATION
Furnish the following information as to the trustee:
(a) Name and address of each examining or supervising authority to which it
is subject.
Federal Reserve Bank of New York (2nd District), New York, New York
(Board of Governors of the Federal Reserve System)
Federal Deposit Insurance Corporation, Washington, D.C.
New York State Banking Department, Albany, New York
(b) Whether it is authorized to exercise corporate trust powers.
The trustee is authorized to exercise corporate trust powers.
2. AFFILIATIONS WITH THE OBLIGOR
If the obligor is an affiliate of the trustee, describe each such
affiliation.
None
3, 4, 5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15:
Electronic Retailing Systems International, Inc. currently is not in
default under any of its outstanding securities for which United States
Trust Company of New York is Trustee. Accordingly, responses to Items 3, 4,
5, 6, 7, 8, 9, 10, 11, 12, 13, 14 and 15 of Form T-1 are not required under
General Instruction B.
16. LIST OF EXHIBITS
T-1.1 -- Organization Certificate, as amended, issued by the State of
New York Banking Department to transact business as a
Trust Company, is incorporated by reference to Exhibit T-1.1
to Form T-1 filed on September 15, 1995 with the Commission
pursuant to the Trust Indenture Act of 1939, as amended by
the Trust Indenture Reform Act of 1990 (Registration No. 33-
97056).
T-1.2 -- Included in Exhibit T-1.1.
T-1.3 -- Included in Exhibit T-1.1.
<PAGE> 3
- 3 -
16. LIST OF EXHIBITS
(cont'd)
T-1.4 -- The By-Laws of United States Trust Company of New
York, as amended, is incorporated by reference to
Exhibit T-1.4 to Form T-1 filed on September 15, 1995
with the Commission pursuant to the Trust Indenture
Act of 1939, as amended by the Trust Indenture Reform
Act of 1990 (Registration No.
33-97056).
T-1.6 -- The consent of the trustee required by Section
321(b) of the Trust Indenture Act of 1939, as amended
by the Trust Indenture Reform Act of 1990.
T-1.7 -- A copy of the latest report of condition of the trustee pursuant
to law or the requirements of its supervising or examining
authority.
NOTE
As of February 7, 1997, the trustee had 2,999,020 shares of Common Stock
outstanding, all of which are owned by its parent company, U.S. Trust
Corporation. The term "trustee" in Item 2, refers to each of United States Trust
Company of New York and its parent company, U. S. Trust Corporation.
In answering Item 2 in this statement of eligibility as to matters peculiarly
within the knowledge of the obligor or its directors, the trustee has relied
upon information furnished to it by the obligor and will rely on information to
be furnished by the obligor and the trustee disclaims responsibility for the
accuracy or completeness of such information.
------------------
Pursuant to the requirements of the Trust Indenture Act of 1939, the trustee,
United States Trust Company of New York, a corporation organized and existing
under the laws of the State of New York, has duly caused this statement of
eligibility to be signed on its behalf by the undersigned, thereunto duly
authorized, all in the City of New York, and State of New York, on the 10th day
of February, 1997.
UNITED STATES TRUST COMPANY
OF NEW YORK, Trustee
By: /s/ Louis P. Young
--------------------------
Louis P. Young
Vice President
<PAGE> 4
EXHIBIT T-1.6
The consent of the trustee required by Section 321(b) of the Act.
United States Trust Company of New York
114 West 47th Street
New York, NY 10036
September 1, 1995
Securities and Exchange Commission
450 5th Street, N.W.
Washington, DC 20549
Gentlemen:
Pursuant to the provisions of Section 321(b) of the Trust Indenture Act of 1939,
as amended by the Trust Indenture Reform Act of 1990, and subject to the
limitations set forth therein, United States Trust Company of New York ("U.S.
Trust") hereby consents that reports of examinations of U.S. Trust by Federal,
State, Territorial or District authorities may be furnished by such authorities
to the Securities and Exchange Commission upon request therefor.
Very truly yours,
UNITED STATES TRUST COMPANY
OF NEW YORK
/s/Gerard F. Ganey
-----------------------------
By: Gerard F. Ganey
Senior Vice President
<PAGE> 5
EXHIBIT T-1.7
UNITED STATES TRUST COMPANY OF NEW YORK
CONSOLIDATED STATEMENT OF CONDITION
SEPTEMBER 30, 1996
(IN THOUSANDS)
<TABLE>
<CAPTION>
ASSETS
<S> <C>
Cash and Due from Banks $ 38,257
Short-Term Investments 82,377
Securities, Available for Sale 861,975
Loans 1,404,930
Less: Allowance for Credit Losses 13,048
-----------
Net Loans 1,391,882
Premises and Equipment 60,012
Other Assets 133,673
-----------
TOTAL ASSETS $ 2,568,176
===========
LIABILITIES
Deposits:
Non-Interest Bearing $ 466,849
Interest Bearing 1,433,894
-----------
Total Deposits 1,900,743
Short-Term Credit Facilities 369,045
Accounts Payable and Accrued Liabilities 143,604
TOTAL LIABILITIES $ 2,413,392
===========
STOCKHOLDER'S EQUITY
Common Stock 14,995
Capital Surplus 42,394
Retained Earnings 98,402
Unrealized Gains (Losses) on Securities
Available for Sale, Net of Taxes (1,007)
-----------
TOTAL STOCKHOLDER'S EQUITY 154,784
TOTAL LIABILITIES AND
STOCKHOLDER'S EQUITY $ 2,568,176
===========
</TABLE>
I, Richard E. Brinkmann, Senior Vice President & Comptroller of the named bank
do hereby declare that this Statement of Condition has been prepared in
conformance with the instructions issued by the appropriate regulatory authority
and is true to the best of my knowledge and belief.
Richard E. Brinkman, SVP & Controller
October 24, 1996
<PAGE> 1
EXHIBIT 99.1
LETTER OF TRANSMITTAL
(INCLUDING FORM W-9 AND GUIDELINES)
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
OFFER TO EXCHANGE ITS 13-1/4% SENIOR DISCOUNT NOTES DUE 2004,
WHICH HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933,
AS AMENDED,FOR ANY AND ALL OF ITS OUTSTANDING
13-1/4% SENIOR DISCOUNT NOTES DUE 2004
PURSUANT TO THE PROSPECTUS, DATED MARCH , 1997
THE EXCHANGE OFFER WILL EXPIRE AT 5:00 P.M., NEW YORK CITY TIME, ON
, 1997, UNLESS EXTENDED (THE "EXPIRATION DATE"). TENDERS MAY
BE WITHDRAWN PRIOR TO 5:00 P.M., NEW YORK CITY TIME, ON , 1997
To: UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: By Overnight Courier By Hand:
United States Trust Company of New United States Trust Company of New United States Trust Company of New
York York York
P.O. Box 844 770 Broadway - 13th Floor 111 Broadway
Cooper Station Corporate Trust Operations Lower level
New York, NY 10276-0844 Department New York, NY 10006
(registered or certified mail New York, NY 10003 Attn: Corporate Trust Services
recommended)
</TABLE>
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm by telephone:
(800) 548-6565
DELIVERY OF THIS LETTER OF TRANSMITTAL TO AN ADDRESS OTHER THAN AS SET
FORTH ABOVE, OR TRANSMISSION OF INSTRUCTIONS VIA FACSIMILE TO A NUMBER OTHER
THAN AS SET FORTH ABOVE, WILL NOT CONSTITUTE A VALID DELIVERY.
The undersigned acknowledges that he or she has received and reviewed
the Prospectus, dated , 1997 (the "Prospectus"), of Electronic Retailing Systems
International, Inc., a Delaware corporation (the "Company"), and this Letter of
Transmittal (this "Letter of Transmittal"), which together constitute the
Company's offer (the "Exchange Offer") to exchange its 13 1/4% Senior Discount
Notes due 2004 (the "New Notes") which have been registered under the Securities
Act of 1933, as amended (the "Securities Act"), pursuant to a Registration
Statement of which this Prospectus is a part, for an equal principal amount at
maturity of its outstanding 13 1/4% Senior Discount Notes due 2004 (the "Old
Notes," and collectively with the New Notes, the "Notes"). Other capitalized
terms used herein but not defined herein have the meaning given to them in the
Prospectus.
<PAGE> 2
2
For each Old Note accepted for exchange, the holder of such Old Note
will receive a New Note having a principal amount at maturity equal to that of
the surrendered Old Note. The form and terms of the New Notes are generally the
same as the form and terms of the Old Notes, except that the New Notes have been
registered under the Securities Act of 1933, as amended, and therefore will not
bear legends restricting the transfer thereof. The New Notes will mature on
February 1, 2004. The New Notes will accrue cash interest at a rate of 13-1/4%
per annum commencing February 1, 2000, and cash interest will be payable
thereafter on February 1 and August 1 of each year, commencing August 1, 2000.
If by [January 24, 1997 + 180 days] neither the Exchange Offer has been
consummated nor a shelf registration statement with respect to the Old Notes has
been declared effective (a "Registration Default"), additional cash interest
will accrue on the Notes, from and including the date on which any such
Registration Default shall occur at the rate of 0.5% per annum of the Accreted
Value of the Old Notes or New Notes, as the case may be. The Company reserves
the right, at any time or from time to time, to extend the Exchange Offer in its
sole discretion, in which case the term "Expiration Date" shall mean the latest
time and date to which the Exchange Offer is extended. The Company shall notify
the Exchange Agent of any extension by oral or written notice and will mail to
the registered holders an announcement thereof, prior to 9:00 A.M., New York
City time, on the next business day after the then Expiration Date.
This Letter is to be used by Holders of Old Notes (i) if certificates
representing the Old Notes are to be physically delivered herewith; or (ii) if
tender of Old Notes is to be made by book-entry transfer to the Exchange Agent's
account at The Depository Trust Company ("DTC"), pursuant to the procedures set
forth in the Prospectus under "The Exchange Offer - Procedures for Tendering" by
any financial institution that is a participant in DTC and whose name appears on
a security position listing as the owner of Old Notes; or (iii) if tender of Old
Notes is to be made according to the guaranteed delivery procedures set forth in
the Prospectus under "The Exchange Offer - Guaranteed Delivery Procedures."
Delivery of the documents to DTC does not constitute delivery to the Exchange
Agent.
The term "Holder" with respect to the Exchange Offer means any person
(i) in whose name Old Notes are registered on the books of the Company or any
other person who has obtained a properly completed bond power from the
registered holder; or (ii) whose Old Notes are held of record by DTC who desires
to deliver such Old Notes by book-entry transfer at DTC. The undersigned has
completed, executed and delivered this Letter of Transmittal to indicate the
action the undersigned desires to take with respect to the Exchange Offer.
Holders who wish to tender their Old Notes must complete this letter in its
entirety.
THE INSTRUCTIONS ACCOMPANYING THIS LETTER OF TRANSMITTAL SHOULD BE READ
CAREFULLY BEFORE THE LETTER OF TRANSMITTAL IS COMPLETED.
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
DESCRIPTION OF 13-1/4% SENIOR DISCOUNT NOTES DUE 2004 ("OLD NOTES")
- ---------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
AGGREGATE PRINCIPAL AMOUNT PRINCIPAL AMOUNT TENDERED (MUST
NAME(S) AND ADDRESS(ES) OF CERTIFICATE REPRESENTED BY BE IN INTEGRAL MULTIPLE OF
REGISTERED HOLDER(S) NUMBERS* CERTIFICATE(S) $1,000)**
(PLEASE FILL IN, IF BLANK)
----------------- ---------------------------- -----------------------------------
----------------- ---------------------------- -----------------------------------
----------------- ---------------------------- -----------------------------------
----------------- ---------------------------- -----------------------------------
----------------- ---------------------------- -----------------------------------
----------------- ---------------------------- -----------------------------------
----------------- ---------------------------- -----------------------------------
Total:
----------------- ---------------------------- -----------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
* Need not be completed if Old Notes are being tendered by book-entry
transfer.
** Unless indicated in the column labeled "Principal Amount Tendered," any
tendering Holder of Old Notes will be deemed to have tendered the entire
aggregate principal amount represented by the column labeled "Aggregate
Principal Amount Represented by Certificate(s)."
If the space provided above is inadequate, list the principal amounts on
a separate signed schedule and affix the list to this Letter of
Transmittal.
The minimum permitted tender is $1,000 in principal amount of Old Notes.
All other tenders must be in integral multiples of $1,000.
- --------------------------------------------------------------------------------
<PAGE> 3
3
- ---------------------------------------------------------
SPECIAL PAYMENT INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4, 5, AND 6)
To be completed ONLY if certificates for Old Notes in a
principal amount not tendered or not accepted for
exchange, or New Notes issued in exchange for Old Notes
accepted for exchange, are to be issued in the name of
someone other than the undersigned, or if the Old Notes
tendered by book-entry transfer that are not accepted
for exchange are to be credited to an account
maintained by DTC.
.
ISSUE CERTIFICATE TO:
Name __________________________________________________
(Please Print)
Address _______________________________________________
_______________________________________________________
(Include Zip Code)
_______________________________________________________
(Tax Identification or Social Security No.)
- ---------------------------------------------------------
- ---------------------------------------------------------
SPECIAL DELIVERY INSTRUCTIONS
(SEE INSTRUCTIONS 3, 4, 5, AND 6)
To be completed ONLY if certificates for Old Notes in
a principal amount not tendered or not accepted for
exchange, or New Notes issued in exchange for Old
Notes accepted for exchange, are to be sent to someone
other than the undersigned, or to the undersigned at
an address other than that shown above.
MAIL TO:
Name __________________________________________________
(Please Print)
Address _______________________________________________
_______________________________________________________
(Include Zip Code)
_______________________________________________________
(Tax Identification or Social Security No.)
- --------------------------------------------------------
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED BY DTC TO THE
EXCHANGE AGENT'S ACCOUNT AT DTC AND COMPLETE THE FOLLOWING:
Name of Tendering Institution: __________________________________________
DTC Book-Entry Account No.: _____________________________________________
Transaction Code No.: ___________________________________________________
[ ] CHECK HERE IF TENDERED OLD NOTES ARE BEING DELIVERED PURSUANT TO A
NOTICE OF GUARANTEED DELIVERY PREVIOUSLY SENT TO THE EXCHANGE AGENT AND
COMPLETE THE FOLLOWING:
Name(s) of Registered Holder(s): ________________________________________
Window Ticket Number (if any): __________________________________________
Date of Execution of Notice of Guaranteed Delivery: _____________________
Name of Institution which guaranteed delivery: __________________________
IF DELIVERY BY BOOK-ENTRY TRANSFER, COMPLETE THE FOLLOWING:
Account Number: _______________ Transaction Code Number: _______________
[ ] CHECK HERE IF YOU ARE A BROKER-DEALER AND WISH TO RECEIVE 10 ADDITIONAL
COPIES OF THE PROSPECTUS AND 10 COPIES OF ANY AMENDMENTS OR SUPPLEMENTS
THERETO.
Name: ___________________________________________________________________
Address: ________________________________________________________________
_________________________________________________________________________
<PAGE> 4
4
Ladies and Gentlemen:
Upon the terms and subject to the conditions of the Exchange Offer, the
undersigned hereby tenders to the Company the aggregate principal amount of Old
Notes indicated above. Subject to, and effective upon, the acceptance for
exchange of Old Notes tendered hereby, the undersigned hereby sells, assigns and
transfers to, or upon the order of, the Company all right, title and interest in
and to such Old Notes as are being tendered hereby.
The tender of Old Notes by a holder as set forth herein will constitute
an agreement between such holder and the Company in accordance with the terms
and subject to the conditions set forth in the Prospectus and in this Letter of
Transmittal.
The undersigned hereby represents and warrants that the undersigned has
full power and authority to tender, sell, assign and transfer the Old Notes
tendered hereby and that the Company will acquire good and unencumbered title
thereto, free and clear of all liens, restrictions, charges and encumbrances and
not subject to any adverse claim when the same are accepted by the Company. The
undersigned hereby further represents that any New Notes acquired in exchange
for Old Notes tendered hereby will have been acquired in the ordinary course of
business of the person receiving such New Notes, whether or not such person is
the undersigned, that neither the holder of such Old Notes nor any such other
person has an arrangement or understanding with any person to participate in the
distribution of such New Notes and that neither the holder of such Old Notes nor
any such other person is an "affiliate," as defined in Rule 405 under the
Securities Act of 1933, as amended (the "Securities Act"), of the Company.
The undersigned also acknowledges that this Exchange Offer is being
made in reliance on interpretations by the staff of the Securities and Exchange
Commission that the New Notes issued in exchange for the Old Notes pursuant to
the Exchange Offer may be offered for resale, resold and otherwise transferred
by holders thereof (other than any such holder that is an "affiliate" of the
Company within the meaning of Rule 405 under the Securities Act), without
compliance with the registration and prospectus delivery provisions of the
Securities Act, provided that such New Notes are acquired in the ordinary course
of such holders' business and such holders have no arrangement or understanding
with any person to participate in the distribution of such New Notes. If the
undersigned is not a broker-dealer, the undersigned represents that it is not
engaged in, and does not intend to engage in, a distribution of New Notes. If
the undersigned is a broker-dealer that will receive New Notes for its own
account in exchange for Old Notes, it represents that the Old Notes to be
exchanged for the New Notes were acquired by it as a result of market-making
activities or other trading activities and acknowledges that it will deliver a
prospectus in connection with any resale of such New Notes; however, by so
acknowledging and by delivering a prospectus, the undersigned will not be deemed
to admit that it is an "underwriter" within the meaning of the Securities Act.
The undersigned will, upon request, execute and deliver any additional
documents deemed by the Company to be necessary or desirable to complete the
sale, assignment and transfer of the Old Notes tendered hereby. All authority
conferred or agreed to be conferred in this Letter of Transmittal and every
obligation of the undersigned hereunder shall be binding upon the successors,
assigns, heirs, executors, administrators, trustees in bankruptcy and legal
representatives of the undersigned and shall not be affected by, and shall
survive, the death or incapacity of the undersigned. This tender may be
withdrawn only in accordance with the procedures set forth in the Prospectus
under "The Exchange Offer - Withdrawal of Tenders."
Unless otherwise indicated under the box entitled "Special Payment
Instructions" above, please deliver the New Notes (and, if applicable,
substitute certificates representing Old Notes for any Old Notes not exchanged)
in the name of the undersigned or, in the case of a book-entry delivery of Old
Notes, please credit the account indicated above maintained at DTC. Similarly,
unless otherwise indicated under the box entitled "Special Delivery
Instructions" above, please send the New Notes (and, if applicable, substitute
certificates representing Old Notes for any Old Notes not exchanged) to the
undersigned at the address shown above in the box entitled "Description of Old
Notes."
<PAGE> 5
5
- --------------------------------------------------------------------------------
SIGN HERE
(TO BE COMPLETED BY ALL TENDERING HOLDERS)
(PLEASE COMPLETE SUBSTITUTE FORM W-9 BELOW)
________________________________________________________________________________
Signature(s) of Owner(s)
________________________________________________________________________________
Dated: _______________, 1996
Name(s) ________________________________________________________________________
________________________________________________________________________________
(Please Print)
Capacity (full title) __________________________________________________________
Address ________________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
(Include Zip Code)
Area Code and Telephone No. ____________________________________________________
Must be signed by registered holder(s) exactly as name(s) appear(s) on stock
certificate(s) or on a security position listing or by person(s) authorized to
become registered holder(s) by certificates and documents transmitted herewith.
If signature is by a trustee, executor, administrator, guardian,
attorney-in-fact, officer of a corporation or other person acting in a fiduciary
or representative capacity, please set forth full title and see Instruction 6.)
GUARANTEE OF SIGNATURE(S)
(SEE INSTRUCTIONS 1 AND 6)
Name of Firm ___________________________________________________________________
Authorized Signature ___________________________________________________________
Dated: _______________, 1996
- --------------------------------------------------------------------------------
<PAGE> 6
6
INSTRUCTIONS
FORMING PART OF THE TERMS AND CONDITIONS OF THE
OFFER TO EXCHANGE REGISTERED 13-1/4% SENIOR DISCOUNT NOTES
FOR ANY AND ALL OUTSTANDING 13-1/4% SENIOR DISCOUNT NOTES
OF
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
1. DELIVERY OF THIS LETTER AND OLD NOTES; GUARANTEED DELIVERY PROCEDURES.
This Letter of Transmittal is to be completed by holders of Old Notes
either if certificates are to be forwarded herewith or if tenders are to be made
pursuant to the procedures for delivery by book-entry transfer set forth in the
Prospectus under "The Exchange Offer -- Book-Entry Transfer." Certificates for
all physically tendered Old Notes, or confirmation of book-entry transfer, as
the case may be, as well as a properly completed and duly executed Letter of
Transmittal (or facsimile thereof) and any other documents required by this
Letter of Transmittal, must be received by the Exchange Agent at the address set
forth herein on or prior to the Expiration Date, or the tendering holder must
comply with the guaranteed delivery procedures set forth below. Old Notes
tendered hereby must be in denominations of principal amount of maturity of
$1,000 and any integral multiple thereof.
Holders of Old Notes whose certificates for Old Notes are not
immediately available or who cannot deliver their certificates and all other
required documents to the Exchange Agent on or prior to the Expiration Date, or
who cannot complete the procedure for book-entry transfer on or prior to the
Expiration Date, may tender their Old Notes pursuant to the guaranteed delivery
procedures set forth in the Prospectus under "The Exchange Offer -- Guaranteed
Delivery Procedures." Pursuant to such procedures, (i) such tender must be made
through an Eligible Institution (as defined below) (ii) on or prior to the
Expiration Date the Exchange Agent must receive from such Eligible Institution a
properly completed and duly executed notice of guaranteed delivery substantially
in the form provided by the Company (the "Notice of Guaranteed Delivery") (by
facsimile transmission, mail or hand delivery) setting forth the name and
address of the holder, the certificate number(s) of such Old Notes (if possible)
and the principal amount at maturity of Old Notes tendered, stating that the
tender is being made thereby and guaranteeing that, within five business trading
days after the Expiration Date, (i) the Letter of Transmittal (or facsimile
thereof) together with the certificate(s) representing the Old Notes and any
other documents required by the Letter of Transmittal will be deposited by the
Eligible Institution with the Exchange Agent, or (ii) that book-entry transfer
of such Old Notes into the Exchange Agent's account at DTC will be effected and
confirmation of such book-entry transfer will be delivered to the Exchange
Agent; and (iii) such properly completed and executed Letter of Transmittal (or
facsimile thereof), as well as the certificate(s) representing all tendered Old
Notes in proper form for transfer and all other documents required by the Letter
of Transmittal, or confirmation of book-entry transfer of the Old Notes into the
Exchange Agent's account at DTC, are received by the Exchange Agent within five
business trading days after the Expiration Date.
THE METHOD OF DELIVERY OF OLD NOTES AND THE LETTER OF TRANSMITTAL AND
ALL OTHER REQUIRED DOCUMENTS TO THE EXCHANGE AGENT IS AT THE ELECTION AND RISK
OF THE HOLDER. INSTEAD OF DELIVERY BY MAIL, IT IS RECOMMENDED THAT HOLDERS USE
AN OVERNIGHT OR HAND DELIVERY SERVICE. IN ALL CASES, SUFFICIENT TIME SHOULD BE
ALLOWED TO ASSURE DELIVERY TO THE EXCHANGE AGENT BEFORE THE EXPIRATION DATE. NO
LETTER OF TRANSMITTAL OR OLD NOTES SHOULD BE SENT TO THE COMPANY. HOLDERS MAY
REQUEST THEIR RESPECTIVE BROKERS, DEALERS, COMMERCIAL BANKS, TRUST COMPANIES OR
NOMINEES TO EFFECT THE ABOVE TRANSACTIONS FOR SUCH HOLDERS.
See "The Exchange Offer" section of the Prospectus.
<PAGE> 7
7
2. PARTIAL TENDERS (NOT APPLICABLE TO HOLDERS OF OLD NOTES WHO TENDER BY
BOOK-ENTRY TRANSFER).
If less than all of the Old Notes evidenced by a submitted certificate
are to be tendered, the tendering holder(s) should fill in the aggregate
principal amount of Old Notes to be tendered in the box above entitled
"Description of Old Notes -- Principal Amount Tendered." A reissued certificate
representing the balance of nontendered Old Notes will be sent to such tendering
holder, unless otherwise provided in the appropriate box on this Letter of
Transmittal, promptly after the Expiration Date. ALL OF THE OLD NOTES DELIVERED
TO THE EXCHANGE AGENT WILL BE DEEMED TO HAVE BEEN TENDERED UNLESS OTHERWISE
INDICATED.
3. SIGNATURES ON THIS LETTER OF TRANSMITTAL; BOND POWERS AND ENDORSEMENTS;
GUARANTEE OF SIGNATURES
If this Letter of Transmittal is signed by the registered holder of the
Old Notes tendered hereby, the signature must correspond exactly with the name
as written on the face of the certificates without any change whatsoever.
If any tendered Old Notes are owned of record by two or more joint
owners, all such owners must sign this Letter of Transmittal.
If any tendered Old Notes are registered in different names on several
certificates, it will be necessary to complete, sign and submit as many separate
copies of this Letter of Transmittal as there are different registrations of
certificates. When this Letter of Transmittal is signed by the registered holder
of the Old Notes specified herein and tendered hereby, no endorsements of
certificates or separate bond powers are required. If, however, the New Notes
are to be issued, or any untendered Old Notes are to be reissued, to a person
other than the registered holder, then endorsements of any certificates
transmitted hereby or separate bond powers are required. Signatures on such
certificates must be guaranteed by an Eligible Institution.
If this Letter of Transmittal is signed by a person other than the
registered holder of any certificates specified herein, such certificates must
be endorsed or accompanied by appropriate bond powers, in either case signed
exactly as the name of the registered holder appears on the certificates and the
signatures on such certificates must be guaranteed by an Eligible Institution.
If this Letter of Transmittal or any certificates or bond power are
signed by trustees, executors, administrators, guardians, attorneys-in-fact,
officers of corporations or others acting in a fiduciary or representative
capacity, such persons should so indicate when signing, and, unless waived by
the Company, proper evidence satisfactory to the Company of their authority to
so act must be submitted.
ENDORSEMENTS ON CERTIFICATES FOR OLD NOTES OR SIGNATURES ON BOND POWERS
REQUIRED BY THIS INSTRUCTION 3 MUST BE GUARANTEED BY A FIRM WHICH IS A MEMBER OF
A REGISTERED NATIONAL SECURITIES EXCHANGE OR A MEMBER OF THE NATIONAL
ASSOCIATION OF SECURITIES DEALERS, INC. OR BY A COMMERCIAL BANK OR TRUST COMPANY
HAVING AN OFFICE OR CORRESPONDENT IN THE UNITED STATES (AN "ELIGIBLE
INSTITUTION") .
SIGNATURES ON THIS LETTER OF TRANSMITTAL NEED NOT BE GUARANTEED BY AN
ELIGIBLE INSTITUTION, PROVIDED THE OLD NOTES ARE TENDERED: (I) BY A REGISTERED
HOLDER OF OLD NOTES (WHICH TERM, FOR PURPOSES OF THE EXCHANGE OFFER, INCLUDES
ANY PARTICIPANT IN THE TRANSFER FACILITY SYSTEM WHOSE NAME APPEARS ON A SECURITY
POSITION LISTING AS THE HOLDER OF SUCH OLD NOTES) WHO HAS NOT COMPLETED THE BOX
ENTITLED "SPECIAL PAYMENT INSTRUCTIONS" OR "SPECIAL DELIVERY INSTRUCTIONS" ON
THIS LETTER OF TRANSMITTAL, OR (II) FOR THE ACCOUNT OF AN ELIGIBLE INSTITUTION.
<PAGE> 8
8
4. SPECIAL PAYMENT AND DELIVERY INSTRUCTIONS.
Tendering holders of Old Notes should indicate in the applicable box
the name and address to which New Notes issued pursuant to the Exchange Offer
and/or substitute certificates evidencing Old Notes not exchanged are to be
issued or sent, if different from the name or address of the person signing this
Letter of Transmittal. In the case of issuance in a different name, the employer
identification or social security number of the person named must also be
indicated. A holder of Old Notes tendering Old Notes by book-entry transfer may
request that Old Notes not exchanged be credited to such account maintained at
DTC as such holder of Old Notes may designate hereon. If no such instructions
are given, such Old Notes not exchanged will be returned to the name or address
of the person signing this Letter of Transmittal.
5. TAXPAYER IDENTIFICATION NUMBER.
Federal income tax law generally requires that a tendering holder whose
Old Notes are accepted for exchange must provide the Company [(as payor)] with
such holder's correct Taxpayer Identification Number ("TIN") on Substitute Form
W-9 below, which, in the case of a tendering holder who is an individual, is his
or her social security number. If the Company is not provided with the current
TIN or an adequate basis for an exemption, such tendering holder may be subject
to a $50 penalty imposed by the Internal Revenue Service. In addition, delivery
of New Notes to such tendering holder may be subject to backup withholding in an
amount equal to 31% of all reportable payments made after the exchange. If
withholding results in an overpayment of taxes, a refund may be obtained.
Exempt holders of Old Notes (including, among others, all corporations
and certain foreign individuals) are not subject to these backup withholding and
reporting requirements. See the enclosed Guidelines of Certification of Taxpayer
Identification Number on Substitute Form W-9 (the "W-9 Guidelines") for
additional instructions.
To prevent backup withholding, each tendering holder of Old Notes must
provide its correct TIN by completing the "Substitute Form W-9" set forth below,
certifying that the TIN provided is correct (or that such holder is awaiting a
TIN) and that (i) the holder is exempt from backup withholding, (ii) the holder
has not been notified by the Internal Revenue Service that such holder is
subject to a backup withholding as a result of a failure to report all interest
or dividends or (iii) the Internal Revenue Service has notified the holder that
such holder is no longer subject to backup withholding. If the tendering holder
of Old Notes is a nonresident alien or foreign entity not subject to backup
withholding, such holder must give the Company a completed Form W-8, Certificate
of Foreign Status. These forms may be obtained from the Exchange Agent. If the
Old Notes are in more than one name or are not in the name of the actual owner,
such holder should consult the W-9 Guidelines for information on which TIN to
report. If such holder does not have a TIN, such holder should consult the W-9
Guidelines for instructions on applying for a TIN, check the box in Part 2 of
the Substitute Form W-9 and write "applied for" in lieu of its TIN. Note:
checking this box and writing "applied for" on the form means that such holder
has already applied for a TIN or that such holder intends to apply for one in
the near future. If such holder does not provide its TIN to the Company within
60 days, backup withholding will begin and continue until such holder furnishes
its TIN to the Company.
6. TRANSFER TAXES.
The Company will pay all transfer taxes, if any, applicable to the
exchange of Old Notes pursuant to the Exchange Offer. If, however, New Notes
and/or substitute Old Notes not exchanged are to be delivered to, or are to be
registered or issued in the name of, any person other than the registered holder
of the Old Notes tendered hereby, or if tendered Old Notes are registered in the
name of any person other than the person signing this Letter of Transmittal, or
if a transfer tax is imposed for any reason other than the transfer of Old Notes
to the Company or its order pursuant to the Exchange Offer, the amount of any
such transfer taxes (whether imposed on the registered holder or any other
persons) will be payable by the tendering holder. If satisfactory evidence of
payment of such taxes or exemption therefrom is not submitted herewith, the
amount of such transfer taxes will be billed directly to such tendering holder.
<PAGE> 9
9
7. WAIVER OF CONDITIONS.
The Company reserves the absolute right to waive satisfaction of any or
all conditions enumerated in the Prospectus.
8. NO CONDITIONAL TENDERS.
No alternative, conditional, irregular or contingent tenders will be
accepted. All tendering holders of Old Notes, by execution of this Letter of
Transmittal, shall waive any right to receive notice of the acceptance of their
Old Notes for exchange.
Neither the Company, the Exchange Agent nor any other person is
obligated to give notice of any defect or irregularity with respect to any
tender of Old Notes nor shall any of them incur any liability for failure to
give any such notice.
9. MUTILATED, LOST, STOLEN OR DESTROYED OLD NOTES.
Any holder whose Old Notes have been mutilated, lost, stolen or
destroyed should contact the Exchange Agent at the address indicated above for
further instructions.
10. REQUESTS FOR ASSISTANCE OR ADDITIONAL COPIES.
Questions and requests for assistance and requests for additional
copies of the Prospectus or this Letter of Transmittal may be directed to the
Exchange Agent at the address specified in the Prospectus. Holders may also
contact their broker, dealer, commercial bank, trust company or other nominee
for assistance concerning the Exchange Offer.
(DO NOT WRITE IN SPACE BELOW)
<TABLE>
<CAPTION>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
CERTIFICATE OLD NOTES OLD NOTES
SURRENDERED TENDERED ACCEPTED
<S> <C> <C> <C>
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
- ---------------------------------------------------------------------------------------------------------------------
</TABLE>
Delivery Prepared by ________________________ Checked By __________Date ________
<PAGE> 10
10
<TABLE>
<CAPTION>
<S> <C> <C>
FORM W-9
(Rev. March 1994) GIVE FORM TO THE REQUESTER.
Department of Treasury REQUEST FOR TAXPAYER DO NOT SEND TO THE IRS
Internal Revenue Service) IDENTIFICATION NUMBER AND CERTIFICATION
- -------------------------------------------------------------------------------------------------------------------------
Name (If joint name, list first and circle the name of the person
or entity whose number you enter in Part I below. See
instructions on page 13 if your name has changed.)
----------------------------------------------------------------------------------------------------------
Business name (Sole proprietors see instructions on page 13.)
Please
----------------------------------------------------------------------------------------------------------
print Please check appropriate box: |_| Individual/Sole Proprietor |_| Corporation |_| Partnership |_|
or Other
----------------------------------------------------------------------------------------------------------
type Address (number, street, apt. or suite no.) Requester's name and address (optional)
--------------------------------------------------
City, state and ZIP code
- --------------------------------------------------------------- --------------------------------------------------
PART I Taxpayer Identification Number (TIN) (List account numbers here (optional)
- ---------------------------------------------------------------
</TABLE>
-----------------------------
Enter your TIN in the appropriate box. For Social Security Number
individuals, this is your social security | | | | | | | | | |
-----------------------------
number (SSN). For sole proprietors, see the or
-----------------------------
instructions on page 13. For other entities, Employer Identification
it is your employer identification number Number
(EIN). If you do not have a number, see | | | | | | | | | |
-----------------------------
HOW TO GET A TIN below.
NOTE: If the account is in more than one
name, see the chart on page 14 for
guideline on whose number to enter.
----------------------------------
PART II For Payee Exempt From
Backup Withholding (See
instructions on page 12)
----------------------------------
- --------------------------------------------------------------------------------
PART III Certification
- --------------------------------------------------------------------------------
Under penalties of perjury, I certify that;
1. The number shown on this form is my correct taxpayer identification (or I
am waiting for number to be issued to me), and
2. I am not subject to backup withholding because: (a) I am exempt from backup
withholding, or (b) I have not been notified by the Internal Revenue
Service that I am subject to backup withholding as a result of a failure to
report all interest or dividends, or (c) the IRS has notified me that I am
no longer subject to backup withholding.
CERTIFICATION INSTRUCTIONS. You must cross out item 2 above if you have been
notified by the IRS that you are currently subject to backup withholding because
of underreporting interest or dividends on your tax return. For real estate
transactions, item 2 does not apply. For mortgage interest paid, the acquisition
or abandonment of secured property, cancellation of debt, contributions to an
individual retirement arrangement (IRA), and generally payments other than
interest and dividends, you are not required to sign the Certification, but you
must provide your correct TIN. (Also, see instructions on page 4.)
- --------------------------------------------------------------------------------
Sign
Here Signature - Date -
- --------------------------------------------------------------------------------
<PAGE> 11
11
GUIDELINES FOR CERTIFICATION OF TAXPAYER IDENTIFICATION NUMBER
ON SUBSTITUTE FORM W-9
SECTION REFERENCES ARE TO THE INTERNAL REVENUE CODE.
Purpose of Form. -- A person who is required to file an information
return with the IRS must obtain your correct Taxpayer Identification Number
("TIN") to report income paid to you, real estate transactions, mortgage
interest you paid, the acquisition or abandonment of secured property, or
contributions you made to an IRA. Use Form W-9 to furnish your correct TIN to
the requester (the person asking you to furnish your TIN) and, when applicable,
(1) to certify that the TIN you are furnishing is correct (or that you are
waiting for a number to be issued), (2) to certify that you are not subject to
backup withholding, and (3) to claim exemption from backup withholding if you
are an exempt payee. Furnishing your correct TIN and making the appropriate
certifications will prevent certain payments from being subject to backup
withholding.
Note: If a requester gives you a form other than a W-9 to request your
TIN, you must use the requester's form.
How to Obtain a TIN. -- If you do not have a TIN, apply for one
immediately. To apply, get Form SS-5, Application for a Social Security Card
(for individuals), from your local office of the Social Security Administration,
or Form SS-4, Application for Employer Identification Number (for businesses and
all other entities), from your local IRS office.
To complete Form W-9 if you do not have a TIN, write "Applied for" in
the space for the TIN, in Part I (or check box 2 of Substitute Form W-9), sign
and date the form, and give it to the requester. Generally, you must obtain a
TIN and furnish it to the requester by the time of payment. If the requester
does not receive your TIN by the time of payment, backup withholding, if
applicable, will begin and continue until you furnish your TIN to the requester.
Note: Writing "Applied for" (or checking box 2 of the Substitute Form
W-9) on the form means that you have already applied for a TIN OR that you
intend to apply for one in the near future.
As soon as you receive your TIN, complete another Form W-9, include
your TIN, sign and date the form, and give it to the requester.
What is Backup Withholding? -- Persons making certain payments to you
are required to withhold and pay to the IRS 31% of such payments under certain
conditions. This is called "backup withholding." Payments that could be subject
to backup withholding include interest, dividends, broker and barter exchange
transactions, rents, royalties, nonemployee compensation, and certain payments
from fishing boat operators, but do not include real estate transactions.
If you give the requester your correct TIN, make the appropriate
certifications, and report all your taxable interest and dividends on your tax
return, your payments will not be subject to backup withholding.
Payments you receive will be subject to backup withholding if:
1. You do not furnish your TIN to the requester, or
2. The IRS notifies the requester that you furnished an incorrect TIN,
or
3. You are notified by the IRS that you are subject to backup
withholding because you failed to report all your interest and dividends on your
tax return (for reportable interest and dividends only), or
4. You do not certify to the requester that you are not subject to
backup withholding under 3 above (for reportable interest and dividend accounts
opened after 1983 only), or
<PAGE> 12
12
5. You do not certify your TIN. This applies only to reportable
interest, dividend, broker, or barter exchange accounts opened after 1983, or
broker accounts considered inactive in 1983.
Certain payees and payments are exempt from backup withholding and
information reporting. See Payees and Payments Exempt From Backup Withholding,
below, if you are an exempt payee.
Payees and Payments Exempt From Backup Withholding. -- The following is
a list of payees exempt from backup withholding and for which no information
reporting is required. For interest and dividends, all listed payees are exempt
except item (9). For broker transactions, payees listed in (1) through (13) and
a person registered under the Investment Advisers Act of 1940 who regularly acts
as a broker are exempt. Payments subject to reporting under sections 6041 and
6041A are generally exempt from backup withholding only if made to payees
described in items (1) through (7), except a corporation that provides medical
and health care services or bills and collects payments for such services is not
exempt from backup withholding or information reporting. Only payees described
in items (2) through (6) are exempt from backup withholding for barter exchange
transactions, patronage dividends, and payments by certain fishing boat
operators.
(1) A corporation. (2) An organization exempt from tax under section
501(a), or an IRA, or a custodial account under section 403(b)(7). (3) The
United States or any of its agencies or instrumentalities. (4) A state, the
District of Columbia, a possession of the United States, or any of their
political subdivisions or instrumentalities. (5) A foreign government or any of
its political subdivisions, agencies, or instrumentalities. (6) An international
organization or any of its agencies or instrumentalities. (7) A foreign central
bank of issue. (8) A dealer in securities or commodities required to register in
the United States or a possession of the United States. (9) A futures commission
merchant registered with the Commodity Futures Trading Commission. (10) A real
estate investment trust. (11) An entity registered at all times during the tax
year under the Investment Company Act of 1940. (12) A common trust fund operated
by a bank under section 584(a). (13) A financial institution. (14) A middleman
known in the investment community as a nominee or listed in the most recent
publication of the American Society of Corporate Secretaries, Inc., Nominee
List. (15) A trust exempt from tax under section 664 or described in section
4947.
Payments of dividends and patronage dividends generally not subject to
backup withholding include the following:
- Payments to nonresident aliens subject to withholding under
section 1441.
- Payments to partnerships not engaged in a trade or business in
the United States and that have at least one nonresident
partner.
- Payments of patronage dividends not paid in money.
- Payments made by certain foreign organizations.
- Payments of interest generally not subject to backup
withholding include the following:
Payments of interest on obligations issued by individuals.
Note: You may be subject to backup withholding if this interest is $600
or more and is paid in the course of the payer's trade or business and you have
not provided your correct TIN to the payer.
- Payments of tax-exempt interest (including exempt-interest
dividends under section 852).
- Payments described in section 6049(b)(5) to nonresident aliens.
- Payments on tax-free covenant bonds under section 1451.
<PAGE> 13
13
- Payments made by certain foreign organizations.
- Mortgage interest paid by you.
Payments that are not subject to information reporting are also not
subject to backup withholding. For details, see sections 6041, 6041(A)(a), 6042,
6044, 6045, 6049, 6050A, and 6050N, and their regulations.
PENALTIES
Failure to Furnish TIN. -- If you fail to furnish your correct TIN
to a requester, you are subject to a penalty of $50 for each such failure unless
your failure is due to reasonable cause and not to willful neglect.
Civil Penalty for False Information With Respect to Withholding. --
If you make a false statement with no reasonable basis that results in no backup
withholding, you are subject to a $500 penalty.
Criminal Penalty for Falsifying Information. -- Willfully
falsifying certifications or affirmations may subject you to criminal penalties
including fines and/or imprisonment.
Misuse of TINs. -- If the requester discloses or uses TINs in
violation of Federal law, the requester may be subject to civil and criminal
penalties.
SPECIFIC INSTRUCTIONS
Name. -- If you are an individual, you must generally provide the
name shown on your social security card. However, if you have changed your last
name, for instance, due to marriage, without informing the Social Security
Administration of the name change, please enter your first name, the last name
shown on your social security card, and your new last name. If you are a sole
proprietor, you must furnish your individual name and either your Social
Security Number ("SSN") or Employer Identification Number ("EIN").
SIGNING THE CERTIFICATION
1. Interest, Dividend, and Barter Exchange Accounts Opened Before
1984 and Broker Accounts Considered Active During 1983. You are required to
furnish your correct TIN, but you are not required to sign the certification.
2. Interest, Dividend, Broker and Barter Exchange Accounts Opened
After 1983 and Broker Accounts Considered Inactive During 1983. You must sign
the certification or backup withholding will apply. If you are subject to backup
withholding and you are merely providing your correct TIN to the requester, you
must cross out item 2 in the certification before signing the form.
3. Real Estate Transactions. You must sign the certification. You
may cross out item 2 of the certification.
4. Other Payments. You are required to furnish your correct TIN, but
you are not required to sign the certification unless you have been notified of
an incorrect TIN. Other payments include payments made in the course of the
requester's trade or business for rents, royalties, goods (other than bills for
merchandise), medical and health care services, payments to a nonemployee for
services (including attorney and accounting fees), and payments to certain
fishing boat crew members.
5. Mortgage Interest Paid by You, Acquisition or Abandonment of
Secured Property, or IRA Contributions. You are required to furnish your correct
TIN, but you are not required to sign the certification.
6. Exempt Payees and Payments. If you are exempt from backup
withholding, you should complete this form to avoid possible erroneous backup
withholding. Enter your correct TIN in Part I, write "EXEMPT" on
<PAGE> 14
14
the form and sign and date the form. If you are a nonresident alien or foreign
entity not subject to backup withholding, give the requester a complete Form
W-8, Certificate of Foreign Status.
7. TIN "Applied for." Follow the instructions under How To Obtain a
TIN, on page 1, and sign and date the form.
Signature. -- For a joint account, only the person whose TIN is shown
in Part I should sign.
Privacy Act Notice. -- Section 6109 requires you to furnish your
correct TIN to persons who must file information returns with the IRS to report
interest, dividends, and certain other income paid to you, mortgage interest you
paid, the acquisition or abandonment of secured property, or contributions you
made to an IRA. The IRS uses the numbers for identification purposes and to help
verify the accuracy of your tax return. You must provide your TIN whether or not
you are required to file a tax return. Payers must generally withhold 31% of
taxable interest, dividend, and certain other payments to a payee who does not
furnish a TIN to a payer. Certain penalties may also apply.
<TABLE>
<CAPTION>
WHAT NAME AND NUMBER TO GIVE THE REQUESTOR
For this type of account: Give name and SSN of:
<C> <S> <C>
1. Individual The individual
2. Two or more individuals (joint account) The actual owner of the account or, if combined
funds, the first individual on the account(1)
3. Custodian account of a minor (Uniform Gift to Minors Act) The minor(2)
4. a. The usual revocable savings trust (grantor is also The grantor-trustee(1)
trustee)
b. So-called trust account that is not a legal or valid The actual owner(1)
trust under state law
5. Sole proprietorship The owner (3)
For this type of account: Give name and EIN of:
6. Sole proprietorship The owner(3)
7. A valid trust, estate, or pension trust The legal entity(4)
8. Corporate The corporation
9. Association, club, religious, charitable, educational, or The organization
other tax-exempt organization
10. Partnership The partnership
11. A broker or registered nominee The broker or nominee
12. Account with the Department of Agriculture in the name of a The public entity
public entity (such as a state or local government, school
district or prison) that receives agricultural program payments
</TABLE>
- ------------
(1) List first and circle the name of the person whose number you furnish.
(2) Circle the minor's name and furnish the minor's SSN.
(3) Show your individual name. You may use your SSN and EIN.
(4) List first and circle the name of the legal trust, estate, or pension
trust. (Do not furnish the TIN of the personal representative or trustee
unless the legal entity itself is not designated in the account title.)
Note: If no name is circled when there is more than one name, the number will
be considered to be that of the first name listed.
<PAGE> 1
EXHIBIT 99.2
Notice of Guaranteed Delivery
for
13-1/4% Senior Discount Notes due 2004
of
ELECTRONIC RETAILING SYSTEMS INTERNATIONAL, INC.
This form or one substantially equivalent hereto must be used to accept
the Exchange Offer of Electronic Retailing Systems International, Inc. (the
"Company") made pursuant to the Prospectus dated March, 1997 (the "Prospectus")
if certificates for the 13-1/4% Senior Discount Notes due 2004 (the "Old Notes")
of the Company are not immediately available, if the procedure for book-entry
transfer cannot be completed on a timely basis, or if time will not permit all
other documents required by the Letter of Transmittal to be delivered to the
Depositary on or prior to the Expiration Date (as defined in the Prospectus).
Such form may be delivered by hand or transmitted by mail or overnight courier,
or (for Eligible Institutions only) by facsimile transmission, to the United
States Trust Company of New York (the "Exchange Agent"). [In addition, in order
to utilize the guaranteed delivery procedure to tender Old Notes pursuant to the
Exchange Offer, a completed, signed and dated Letter of Transmittal (or
facsimile thereof) must also be received by the Exchange Agent prior to 5:00
P.M., New York City time, on the Expiration Date.] Capitalized terms used but
not defined herein have the meaning given to them in the Prospectus.
To: UNITED STATES TRUST COMPANY OF NEW YORK
<TABLE>
<CAPTION>
<S> <C> <C>
By Mail: By Overnight Courier By Hand:
United States Trust Company of New United States Trust Company of New United States Trust Company of New
York York York
P.O. Box 844 770 Broadway - 13th Floor 111 Broadway
Cooper Station Corporate Trust Operations Lower level
New York, NY 10276-0844 Department New York, NY 10006
(registered or certified mail New York, NY 10003 Attn: Corporate Trust Services
recommended)
</TABLE>
By Facsimile:
(212) 420-6152
(For Eligible Institutions Only)
Confirm by telephone:
(800) 548-6565
<PAGE> 2
2
DELIVERY OF THIS INSTRUMENT TO AN ADDRESS, OR TRANSMISSION OF
INSTRUCTIONS VIA A FACSIMILE, OTHER THAN AS SET FORTH ABOVE, DOES NOT CONSTITUTE
A VALID DELIVERY.
This form is not to be used to guarantee signatures. If a signature on
the Letter of Transmittal to be used to tender Old Notes is required to be
guaranteed by an "Eligible Institution" under the instructions thereto, such
signature guarantee must appear in the applicable space provided on the Letter
of Transmittal.
Ladies and Gentlemen:
The undersigned hereby tenders to Electronic Retailing Systems
International, Inc., a Delaware Corporation (the "Company"), upon the terms and
subject to the conditions set forth in the Prospectus and the Letter of
Transmittal (which together constitute the "Exchange Offer"), receipt of which
is hereby acknowledged, the principal amount of Old Notes listed below, pursuant
to the guaranteed delivery procedures set forth in Instruction 1 of the Letter
of Transmittal.
<PAGE> 3
3
NOTE: SIGNATURES MUST BE PROVIDED WHERE INDICATED BELOW:
Principal Amount(s) of Old Notes
......................................................
......................................................
Name(s) of Record Holder(s)
......................................................
......................................................
PLEASE PRINT OR TYPE
Address...............................................
ZIP CODE
Area Code and Tel. No.................................
Signature(s)..........................................
......................................................
Dated: ...............................................
If Old Notes will be delivered by book-entry transfer
at The Depository Trust Company (*DTC*), Depository
Account No.:..........................................
This Notice of Guaranteed Delivery must be signed by the registered
Holder(s) of Old Notes exactly as its (their) name(s) appear on certificates for
Old Notes or on a security position listing as the owner of Old Notes, or by
person(s) authorized to become registered Holder(s) by endorsements and
documents transmitted with this Notice of Guaranteed Delivery. If signature is
by a trustee, executor, administrator, guardian, attorney-in-fact, officer or
other person acting in a fiduciary or representative capacity, such person must
provide the following information.
Please print name(s) and address(es)
Name(s):
.............................................................
.............................................................
Capacity:
.............................................................
Address(es):
.............................................................
.............................................................
<PAGE> 4
4
GUARANTEE
(NOT TO BE USED FOR SIGNATURE GUARANTEE)
The undersigned, a member firm of a registered national securities
exchange or of the National Association of Securities Dealers, Inc., or a
commercial bank or trust company having an office or correspondent in the United
States or an "Eligible Guarantor Institution" within the meaning of Rule 17Ad-15
under the Securities Exchange Act of 1934, as amended (the "Exchange Act"),
hereby guarantees (a) that the above named person(s) "own(s)" the Old Notes
tendered hereby within the meaning of Rule 10b-4 under the Exchange Act, (b)
that such tender of Old Notes complies with Rule 10b-4 under the Exchange Act
and (c) that delivery to the Exchange Agent of certificates for the Old Notes
tendered hereby, in proper form for transfer (or confirmation of the book-entry
transfer of such Old Notes into the Exchange Agent's Account at DTC, pursuant to
the procedures for book-entry transfer set forth in the Prospectus), with
delivery of a properly completed and duly executed Letter of Transmittal (or
manually signed facsimile thereof) with any required signature and any other
required documents, will be received by the Exchange Agent at one of its
addresses set forth above within five business trading days after the Expiration
Date.
THE UNDERSIGNED ACKNOWLEDGES THAT IT MUST DELIVER THE LETTER OF
TRANSMITTAL AND OLD NOTES TENDERED HEREBY TO THE EXCHANGE AGENT WITHIN THE TIME
PERIOD SET FORTH ABOVE AND THAT FAILURE TO DO SO COULD RESULT IN FINANCIAL LOSS
TO THE UNDERSIGNED.
Name of Firm..........................................
Address...............................................
......................................................
ZIP CODE
Area Code and Tel. No.................................
......................................................
AUTHORIZED SIGNATURE
Name..................................................
PLEASE PRINT OR TYPE
Title.................................................
Date..................................................
Dated: _______________________________, 1997
NOTE: DO NOT SEND OLD NOTES WITH THIS FORM; OLD NOTES SHOULD BE SENT WITH
YOUR LETTER OF TRANSMITTAL SO THAT THEY ARE RECEIVED BY THE EXCHANGE
AGENT WITHIN FIVE BUSINESS TRADING DAYS AFTER THE EXPIRATION DATE.
